oversight

Special Allowance Payments to New Mexico Educational Assistance Foundation for Loans Funded by Tax-Exempt Obligations.

Published by the Department of Education, Office of Inspector General on 2005-05-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               Special Allowance Payments to 

       New Mexico Educational Assistance Foundation 

        for Loans Funded by Tax-Exempt Obligations



                                    FINAL AUDIT REPORT




                                            ED-OIG/A05E0017 

                                                MAY 2005 





Our mission is to promote the efficiency,                       U.S. Department of Education
effectiveness, and integrity of the                             Office of Inspector General
Department’s programs and operations.                           Chicago, Illinois
                                         NOTICE
               Statements that managerial practices need improvements, as well
              as other conclusions and recommendations in this report, represent
              the opinions of the Office of Inspector General. Determinations of
                 corrective action to be taken will be made by the appropriate
                               Department of Education officials.

 In accordance with Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the
        extent information contained therein is not subject to exemptions in the Act.
                                         MAY 24, 2005 


Mr. Elwood G. Farber, President
New Mexico Educational Assistance Foundation
7400 Tiburon
Albuquerque, New Mexico 87109


Dear Mr. Farber:

Enclosed is our final audit report, Control Number ED-OIG/A05E0017, entitled Special
Allowance Payments to New Mexico Educational Assistance Foundation for Loans Funded by
Tax-Exempt Obligations. This report incorporates the comments you provided in response to the
draft report. If you have any additional comments or information that you believe may have a
bearing on the resolution of this audit, you should send them directly to the following Education
Department official, who will consider them before taking final Departmental action on this
audit:

                              Theresa Shaw
                              Chief Operating Officer
                              Federal Student Aid
                              U.S. Department of Education
                              Union Center Plaza
                              830 First Street, NE
                              Washington, DC 20202

It is the policy of the U. S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

                                             Sincerely,

                                             /s/

                                             Richard J. Dowd
                                             Regional Inspector General
                                               for Audit

Enclosure
                SPECIAL ALLOWANCE PAYMENTS

      TO NEW MEXICO EDUCATIONAL ASSISTANCE FOUNDATION

         FOR LOANS FUNDED BY TAX-EXEMPT OBLIGATIONS


                                     ED-OIG/A05E0017 


                                   TABLE OF CONTENTS

                                           Page

Executive Summary…………………………………………………………….…… 1 


Background………………………………………………………………………..…                                                 2     


Audit Results…………………………………………………………………….…...                                             4     


   Finding No. 1 – After loans were transferred as security for new obligations and 

   prior obligations were retired, New Mexico Educational Assistance Foundation 

   continued to bill for payments using the 9.5 percent floor calculation...…….……        4


   Finding No. 2 – New Mexico Educational Assistance Foundation received 

   special allowance payments, under the 9.5 percent floor calculation, for loans 

   funded by obligations that were issued after October 1, 1993...…………………..             13 


   Finding No. 3 – New Mexico Educational Assistance Foundation incorrectly 

   categorized a $4.7 million loan balance as eligible for the 9.5 percent floor 

   calculation.………….………….….....……………………………………..….….                                     16     


Objective, Scope, and Methodology….……………………………………….…….                                  17     


Appendix A – New Mexico Educational Assistance Foundation Bond Genealogy.… A-1


Appendix B – Analysis of Loan Balance Distribution……………………………….                         B-1


Appendix C – Potential Overpayment in Finding No. 2…………………………..…. C-1


Appendix D –New Mexico Educational Assistance Foundation Response to Draft 

  Audit Report………………………………………………………………………. D-1

Special Allowance Payments to NMEAF 	                                                     ED-OIG/A05E0017


                                            EXECUTIVE SUMMARY

Special allowance payments are made to lenders in the Federal Family Education Loan (FFEL)
Program to ensure that lenders receive an equitable return on their loans. In general, the amount
of a special allowance payment is the difference between the amount of interest the lender
receives from the borrower or the government and the amount that is provided under
requirements in the Higher Education Act of 1965, as amended (HEA).

The HEA includes a special allowance calculation for loans that are funded by tax-exempt
obligations issued before October 1, 1993. The quarterly special allowance payment for these
loans may not be less than 9.5 percent, minus the interest the lender receives from the borrower
or the government, divided by 4. When interest rates are low, this 9.5 percent floor calculation
provides a significantly greater return than lenders receive for other loans.

The objective of our audit was to determine whether the use of tax-exempt obligations by the
New Mexico Educational Assistance Foundation (NMEAF) to finance student loans, billed at the
9.5 percent special allowance rate, is in compliance with requirements in the HEA, regulations,
and other guidance issued by the Department. To accomplish our objective, we examined
NMEAF’s issuance of tax-exempt obligations, the criteria NMEAF used to determine whether a
loan qualified for the 9.5 percent floor calculation, and other information.

We determined that NMEAF received improper special allowance payments under the 9.5
percent floor calculation for loans that were—

• 	 Transferred as security for a new obligation after the prior tax-exempt obligation was retired.
    We determined that an average of $301.3 million in ineligible loans were included in billings
    for the five quarters covering the period from October 1, 2002, through December 31, 2003.
    We calculated that the amount of overpayments received on these loans may potentially be
    $18.4 million.1

• 	 Funded by tax-exempt obligations issued after October 1, 1993. Our informal calculation,
    based on 70 loans selected judgmentally, indicates that NMEAF might have received special
    allowance overpayments on loans in this category totaling about $17.2 million for the five
    quarters covering the period from October 1, 2002, through December 31, 2003.1

• 	 Incorrectly categorized and billed. While researching one of our questions, NMEAF
    discovered that it had incorrectly categorized loan balances of approximately $4.7 million as
    eligible for the 9.5 percent floor calculation, causing a $688,767 overpayment.1




1
 These calculations cannot be added to determine a total, unduplicated liability. Many of the loans for which
NMEAF received overpayments were included in two or more of our findings.


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We recommend that the Chief Operating Officer (COO) for Federal Student Aid (FSA) instruct
NMEAF to include only eligible loans in the amounts it identifies for payment under the 9.5
percent floor calculation. We also recommend that the COO for FSA calculate and require the
return of the overpayments described in this report.

A draft of this report was provided to NMEAF for review and comment. In its comments,
NMEAF objected strongly to our findings and recommendations, stating that, other than for the
misclassified amount it identified for the OIG during its audit, it has been billing the Department
correctly for special allowance payments under the 9.5 percent floor calculation. Where
appropriate, we have incorporated into this report summaries of NMEAF’s comments and our
responses. We provide NMEAF’s response to our draft report as Appendix D. Other than
revising the presentation of certain criteria in Finding No. 1, we did not change our findings or
recommendations based on NMEAF’s comments.


                                                    BACKGROUND

A lender participating in the FFEL Program is entitled to a quarterly special allowance payment
for loans in its portfolio. In general, for Stafford loans,2 the amount of the quarterly special
allowance payment is calculated by—

1. 	 Determining the average of the bond equivalent rates of 91-day Treasury bills auctioned
     during the quarter,
2. 	 Adding a specified percentage to this amount (the specified percentage varies based on the
     loan’s type, origination date, and other factors),
3. 	 Subtracting the interest percentage the lender receives on the loan from the borrower or the
     government, and
4. 	 Dividing the resulting percentage by 4. (34 C.F.R. § 682.302(c))3

Under Section 438(a) of the HEA, the purpose of special allowance payments is to ensure—

           . . . that the limitation on interest payments or other conditions (or both) on loans
           made or insured under this part, do not impede or threaten to impede the carrying
           out of the purposes of this part or do not cause the return to holders of loans to be
           less than equitable . . . .

The Education Amendments of 1980 (Pub. L. 96-374) created a separate calculation for FFEL
Program loans made or purchased with proceeds of tax-exempt obligations, and the Higher
Education Amendments of 1992 (Pub. L. 102-325) continued this separate calculation for loans
with variable interest rates.

In general, the quarterly special allowance payments for these loans is one half of the percentage
determined under the method described above, using 3.5 percent as the specified percentage in
Step 2. However, the separate calculation also provides a minimum payment. The special
2
    The calculation used for other types of FFEL Program loans is slightly different.
3
    All regulatory citations are the version dated July 1, 2002.


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allowance payments for these loans “shall not be less than 9.5 percent minus the applicable
interest rate on such loans, divided by 4.” (Section 438(b)(2)(B) (i) and (ii) of the HEA)

In this report, we refer to this separate calculation as the “9.5 percent floor calculation.” The
Student Loan Reform Act of 1993, which was included in the Omnibus Budget Reconciliation
Act of 1993 (Pub. L. 103-66), repealed the separate calculation for loans made or purchased with
the proceeds of tax-exempt obligations, including the 9.5 percent floor calculation, restricting it
to loans made or purchased with the proceeds of tax exempt obligations that were originally
issued before October 1, 1993.

When interest rates are low, the 9.5 percent floor calculation results in significantly greater
special allowance payments than the lender would otherwise receive. For example, for the
quarter ending December 31, 2003, for a FFEL Program Stafford loan made on January 15,
2000, with an average daily balance of $5,000, a lender would receive $76 under the 9.5 percent
floor calculation (payment rate of 1.52 percent). Under the calculation that would be used if the
same loan was not eligible for the 9.5 percent floor calculation (payment rate of 0.0025 percent),
the lender would receive $0.125.

NMEAF is a private, nonprofit corporation, located in Albuquerque, New Mexico, and was
created by the New Mexico State Legislature. It participates in the FFEL Program as both an
originating lender and as a secondary market, and uses tax-exempt obligations to fund its FFEL
Program loans. Eight of NMEAF’s tax-exempt bonds were issued before October 1, 1993 (pre-
1993), and were eligible to fund loans qualified to receive special allowance payments under the
9.5 percent floor calculation:

       Table 1
                                                                       9.5% Amount
                                      Original          Original        Outstanding
            #      Bond Issue        Issue Date      Issue Amount       on 09/30/93
            1   1985                 8/21/1985          $ 94,925,000                $0
            2   1987                 4/13/1987          $ 31,745,000        $ 5,255,000
            3   1988                 7/28/1988          $ 69,740,000       $ 43,805,000
            4   1988-B               12/29/1988         $ 71,835,000                 $0
            5   1992 A & B            4/14/1992        $ 140,000,000      $ 140,000,000
            6   1992 One-A & B       12/17/1992         $ 71,835,000       $ 71,835,000
            7   1993 Two-A & B        3/30/1993         $ 38,000,000       $ 38,000,000
            8   1993 I               9/28/1993         $ 150,000,000      $ 150,000,000
                                                              Total:      $ 448,895,000

In Table 1, the total outstanding amount available to NMEAF to fund loans under the 9.5 percent
floor calculation, as of September 30, 1993, was $448,895,000. The amounts for Bonds 1 and 4
are not included in this total, because they were paid off and retired before September 30, 1993,
by Bonds 7 and 6, respectively.




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Using the Bond Genealogy prepared by NMEAF (see Appendix A), we determined that, from
October 1, 1993, through October 9, 2003, NMEAF issued—

• 	 Twenty-four tax-exempt bonds, totaling $688,185,000, which NMEAF used either to pay off
    its pre-1993 bonds or to pay off bonds that refunded those subsequent bonds (for example,
    bonds NMEAF used to refund prior bonds that paid off the pre-1993 bonds); and

• 	 Nineteen tax-exempt bonds, totaling $333,890,000, and one taxable bond, for $10 million,
    which NMEAF used to finance loans it did not consider eligible for the 9.5 percent floor
    calculation.

For the period October 1, 1994, through March 31, 2004, NMEAF received $60.9 million in
special allowance payments under the 9.5 percent floor calculation.


                                        AUDIT RESULTS

NMEAF’s policy of using tax-exempt bonds issued after October 1, 1993, either to pay off its
pre-1993 bonds or to pay off bonds that refunded those subsequent bonds, did not result in
NMEAF’s increasing the amount of loans it claimed as eligible for the 9.5 percent floor
calculation beyond the amount outstanding as of September 30, 1993. However special
allowance payments to NMEAF under the 9.5 percent floor calculation for October 1, 1994,
through December 31, 2003, were not all made in compliance with requirements in the HEA,
regulations, and other guidance issued by the Department. As a result of NMEAF’s practices for
identifying loans eligible for the 9.5 percent floor calculation, NMEAF billed for and was
overpaid special allowance for loans (1) that were pledged or transferred to a new funding source
after the prior obligation was retired; (2) that were not funded by pre-1993 obligations; and (3)
for which the funding source had been incorrectly categorized.

FINDING NO. 1– AFTER LOANS WERE TRANSFERRED AS SECURITY FOR NEW OBLIGATIONS AND
PRIOR OBLIGATIONS WERE RETIRED, NMEAF CONTINUED TO BILL FOR PAYMENTS USING THE
9.5 PERCENT FLOOR CALCULATION.

When issuing a tax-exempt obligation to refund a prior obligation, NMEAF’s practice was to use
the funds from the new obligation to pay off and retire the prior obligation. Loans made or
purchased with the proceeds of the prior obligation were pledged or transferred as security for
the new obligation. (See Appendix A.)

All of NMEAF’s pre-1993 bonds were paid off and retired using this method. When billing the
Department for special allowance payments, NMEAF considers a loan eligible for the 9.5
percent calculation if the loan is funded by one of the pre-1993 bonds, or the proceeds of tax-
exempt refundings of such obligations.




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The publication of final regulations by the Department, on December 18, 1992 (57 FR 60280),
established criteria for determining when a loan’s eligibility for the 9.5 percent floor calculation
terminates. Under 34 C.F.R. § 682.302(e)(2), a loan is not eligible for the 9.5 percent floor
calculation—

           (i) After the loan is pledged or otherwise transferred in consideration of funds
       derived from sources other than [a tax-exempt obligation subject to the 9.5
       percent floor calculation]; and
           (ii) If the authority retains a legal or equitable interest in the loan—
           (A) The prior tax-exempt obligation is retired; or
           (B) The prior tax-exempt obligation is defeased by means of obligations that
       the Authority certifies in writing to the Secretary bear a yield that does not exceed
       the yield permitted under Internal Revenue Service regulations, 26 CFR 1.103–
       14, with regard to investments of proceeds of a tax-exempt refunding obligation.

As stated in the Background section, the Omnibus Budget Reconciliation Act of 1993 limited the
eligibility of tax-exempt obligations subject to the 9.5 percent calculation to those that were
originally issued before October 1, 1993. In a Dear Colleague Letter issued in March 1996 (96-
L-186), the Department explained the application of 34 C.F.R. § 682.302(e) for determining the
eligibility of certain loans for the 9.5 percent floor calculation:

       Under the regulations, if a loan made or acquired with the proceeds of a tax-
       exempt obligation is refinanced with the proceeds of a taxable obligation, the loan
       remains subject to the tax-exempt special allowance provisions if the authority
       retains legal interest in the loan. If, however, the original tax-exempt obligation is
       retired or defeased, special allowance is paid based on the rules applicable to the
       new funding source (taxable or tax-exempt).
                                      *   *   *   *    *   *   *
       Adjustments to ED 799 billings and current billings for any loans covered by this
       policy should be made using the applicable tax-exempt special allowance codes
       for the periods that the holder retains legal interest in the loan and the original tax-
       exempt obligation has not been retired or defeased.

In final regulations published on October 29, 1999 (64 FR 58622), and effective on July 1, 2000,
the Department incorporated the changes made by the Omnibus Budget Reconciliation Act of
1993, limiting the application of the 9.5 percent floor calculation to tax-exempt obligations
originally issued before October 1, 1993. This change to the regulations confirmed the criteria,
in 34 C.F.R. § 682.302(e), for terminating a loan’s eligibility for the 9.5 percent floor
calculation: loans eligible for the 9.5 percent floor calculation after enactment of the Omnibus
Budget Reconciliation Act of 1993 become ineligible when they are transferred in consideration
of funds derived from sources other than a tax-exempt obligation subject to the 9.5 percent floor
calculation and the prior tax-exempt obligation is retired or defeased.




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The Department summarized the application of 34 C.F.R. § 682.302(e) in its response to a report
issued by the United States Government Accountability Office in September 2004 (Federal
Family Education Loan Program: Statutory and Regulatory Changes Could Avert Billions in
Unnecessary Federal Subsidy Payments, GAO-04-1070):

       In general, under the Department’s regulations, loans that are eligible for the
       special 9.5 percent subsidy retain that eligibility as long as the tax-exempt bond
       whose proceeds were used to make or purchase the loans remains open. In other
       words, absent a change in the law, unless and until the original financing
       instrument is retired or defeased, the loans it supports qualify for the special
       subsidy.

Under the Department’s regulatory criteria, loans become ineligible for the 9.5 percent floor
calculation on the date they are pledged or transferred as security for a new obligation and the
original financing tax-exempt obligation is retired. In its special allowance payment billing,
NMEAF continued to identify loans as eligible for the 9.5 percent floor calculation after the date
the loans became ineligible.

All of NMEAF’s pre-1993 obligations were paid off and retired no later than December 9, 2002.
As a result, all previously eligible loans that were pledged or transferred as security for new
obligations—including loans funded directly by new obligations—became ineligible to receive a
special allowance payment using the 9.5 percent floor calculation.

The following table shows retirement dates for NMEAF’s pre-1993 bonds, listed in Table 1, that
were outstanding on September 30, 1993:

               Table 2
                    #        Bond Issued . . .            Retired on. . .
                    2          4/13/1987                    3/1/1995
                    3          7/28/1988                   8/23/1994
                    5          4/14/1992                    4/1/2002
                    6          12/17/1992                  12/9/2002
                    7          3/30/1993                   12/3/2001
                    8          9/28/1993                    3/1/1995

NMEAF received a cumulative total of $18,612,649 in special allowance payments, under the
9.5 percent floor calculation, for the five quarters covering the period October 1, 2002, through
December 31, 2003. This payment amount was based on an average quarterly loan balance,
reported by NMEAF, of about $304.5 million. We re-calculated NMEAF’s average quarterly
loan balance, removing the loans that are ineligible under the criteria we describe above, and
found that NMEAF’s eligible loan balance was overstated, on average, by about $301.3 million
for each quarter. The average quarterly balance eligible for the 9.5 percent floor calculation was
about $3.2 million. (See Appendix B.)

We did not determine the overpayments attributed to the ineligible loans. However, we
calculated that NMEAF may have been potentially overpaid $18.4 million in special allowance


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for those five quarters, assuming that the overpayments were proportional to the overstated
eligible loan balances. (See Table 3.)

Table 3
                                            Special                                      Potential
    Quarter              Balance         Allowance          Revised      Revised          Amount
     Ending              Claimed               Paid        Balance      Payment          Overpaid
    12/31/02         $286,119,485        $3,556,257      $6,745,739      $83,845        $3,472,412
     3/31/03         $299,105,216        $3,401,772      $2,763,660      $31,432        $3,370,340
     6/30/03         $308,246,554        $3,536,669      $2,491,967      $28,592        $3,508,077
     9/30/03         $314,111,557        $4,042,674      $2,177,994      $28,031        $4,014,643
    12/31/03         $315,134,264        $4,075,277      $1,924,461      $24,887        $4,050,390
Total                                   $18,612,649                     $196,787       $18,415,862


In Table 3, the column(s) headed—

• 	 Balance Claimed and Special Allowance Paid contain the actual balance of the loans
    NMEAF reported as eligible for the 9.5 percent floor calculation on its quarterly special
    allowance billing request and the actual amount of the Department’s special allowance
    payment to NMEAF.

• 	 Revised Balance is our determination of the loan balance eligible for payments using the 9.5
    percent floor. To identify these amounts, we included the balances, during each quarter,
    attributable to loans that (1) had not been pledged or transferred as security for a new
    obligation or (2) were funded by a pre-1993 obligation that had not been retired or defeased.
    (See Appendix B.)

• 	 Revised Payment is our calculation of the amount of the Special Allowance Paid that is
    proportional to the revised balance. To calculate the Revised Payment, we determined the
    percentage of the Balance Claimed represented by the Revised Balance, and we multiplied
    the Special Allowance Paid by that percentage: (Revised Balance / Balance Claimed) X
    Special Allowance Paid.

• 	 Potential Amount Overpaid is the Special Allowance Paid minus the Revised Payment.

Recommendations:

We recommend that the COO for FSA—

1.1 	 Instruct NMEAF to include only eligible loans in the amounts it identifies for payment
      under the 9.5 percent floor calculation;

1.2 	 Determine and require NMEAF to return special allowance overpayments it received for
      the five quarters covering the period October 1, 2002, through December 31, 2003, for
      which we calculated an $18.4 million potential overpayment; and



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1.3 	 Determine and require NMEAF to return all other overpayments it received for special
      allowance after October 1, 1999.4

Liability calculations for this finding and for other findings in this report should be consolidated
to ensure that NMEAF is not required to return an overpayment attributable to the same loans
under two or more findings.

NMEAF Comments:

NMEAF strongly objects to this finding and its recommendations.5 NMEAF provides the
following reasons for its non-concurrence:

    1. 	 Meaning of “Originally.” In general, under the HEA, loans are eligible for the 9.5
         percent calculation if they are funded by obligations “originally issued” before October 1,
         1993, and loans are ineligible for the 9.5 percent calculation if they are funded by
         obligations “originally issued” on or after October 1, 1993. The OIG misinterprets the
         word “originally,” as that word is used in Section 438(b)(2)(B)(iv) of the HEA, and in
         related regulations and guidance issued by the Department.

         When Congress was drafting the Omnibus Budget Reconciliation Act of 1993, lenders
         approached their representatives with concerns about the impact of the loss of special
         allowance payments under the 9.5 percent calculation. To address their concerns,
         Congress included the word “originally” in Section 438(b)(2)(B)(iv) of the HEA, to
         enable refundings of tax-exempt bond issues and transfers of loans. For example, with
         the addition of the word “originally”, an obligation issued in 1995, if used to refinance a
         pre-1993 obligation, would be considered an obligation that was “originally issued” on
         the same date that the pre-1993 obligation was issued.

         NMEAF acknowledges that it is not providing documentation to support its interpretation
         of the word “originally,” stating, “We can understand that the Office of the Inspector
         General might not be willing to accept our word on this but we assume that the
         circumstances described should be verifiable from pre-introduction drafts of the
         legislation.” As additional support for its position, NMEAF cites the substantially
         contemporaneous statements of the Department of Education in Dear Colleague Letters


4
  Here and elsewhere in this report, we limit our recommendations for return of overpayments to those for billings
after October 1, 1999, to provide for record retention requirements. Under 34 C.F.R. § 682.414(a)(4)(iii), a lender is
required to keep loan records for three years after the loan is paid off by the borrower or five years if the loan is paid
off by anyone else. Under 34 C.F.R. § 682.414(a)(4)(iv), a lender is required to keep a copy of its audit report for no
less than 5 years after the audit report is issued. The rules for lenders’ record retention do not describe any other
retention periods, including the retention of data to support billings for special allowance payments. Since the
reports for these billings would not be included in borrowers’ files, and are not “loan records,” we have limited our
recommendations to a five-year period.
5
  NMEAF’s response to our draft report includes separate comments from NMEAF and from its counsel. Our
summaries of NMEAF’s comments do not distinguish between NMEAF’s comments and its counsel’s comments.
Both are identified as “NMEAF’s comments.”


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      issued from November 1993 through June 1995, “all of which reiterate how floor
      treatment will apply to loans refinanced by post October 1, 1993 tax exempt obligations.”

   2. 	 Criteria. If the position taken in Finding No. 1 were accurate, all the regulations and
        guidance issued by the Department after the Omnibus Budget Reconciliation Act of 1993
        would have to be ignored. For example, the OIG’s report ignores the applicable statute,
        regulations, and Departmental guidance on the treatment of refunding bonds. NMEAF
        cites Dear Colleague Letter 93-L-161 (November 1993) and Dear Colleague Letter 93-L-
        163(LD) (December 1993), which state, “Refinancing of obligations which were
        originally issued prior to October 1, 1993, does not alter the eligibility of loans made or
        purchased with funds obtained from the proceeds of the original financing to receive the
        minimum special allowance.”

      NMEAF also cites Dear Colleague Letter 95-L-181(LD) (June 1995), which states—

              Tax-exempt loans made or purchased with funds obtained by the holder from the
              issuance, or refinancing, of obligations originally issued prior to October 1, 1993
              ("old money") will continue to be calculated by taking the greater of one-half the
              annual special allowance rate using 3.5% in the formula, or using the floor of
              9.5% less the applicable interest rate. [Italics added.]

      The guidance in these letters, and in other Departmental guidance, allows an extended
      eligibility for the 9.5 percent floor calculation, beyond the retirement of the original bond.

      Further, NMEAF suggests that 34 C.F.R. § 682.302(e), as cited in OIG’s report, did not
      apply to NMEAF’s billing for special allowance payments until July 1, 2000. The
      Department’s regulations to implement the provisions of the Omnibus Budget
      Reconciliation Act of 1993, which established an October 1, 1993, cutoff date for loans’
      eligibility for the 9.5 percent floor, were not issued until October 29, 1999 (64 FR 58622)
      and were not effective until July 1, 2000.

   3. 	 Private Letter. The Department has issued clear guidance contradicting the position
        reflected in this audit report. On October 14, 1993, attorneys for the Alabama Higher
        Education Corporation sent an inquiry to the Department about the continued eligibility
        of certain bonds for special allowance payments under the 9.5 percent floor calculation.
        The Acting Chief of the Department’s Loan Branch, Division of Policy Development,
        Policy, Training, and Analysis Service responded on November 24, 1993.

      The response agreed that loans funded by the bonds in question would continue to be
      treated as if they were funded by the pre-1993 bond, stating—

              You indicated that the Alabama Higher Education Loan Corporation (the
              Corporation) intends to issue “tax-exempt” refunding bonds to redeem or
              otherwise retire the three original obligations, specified in your letter, each of
              which was issued prior to October 1, 1993. Based on the facts presented in your
              letter, we concur that the special allowance rates will continue to be determined



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              pursuant to §§438(b)(2)(B)(i) and (ii) of the Higher Education Act of 1965, as
              amended.

      Also, an internal e-mail was sent by policy staff at the Department to regional
      Department staff, on July 17, 2002, which supports NMEAF’s position. The e-mail
      confirmed that the refunding bonds continued to maintain the eligibility for the 9.5 %
      floor treatment.

   4. 	 GAO Report to Congressional Requesters. The OIG’s report cites a paragraph of the
        Department’s response to a report issued by GAO in September 2004: Federal Family
        Education Loan Program: Statutory and Regulatory Changes Could Avert Billions in
        Unnecessary Federal Subsidy Payments, GAO-04-1070. However, the OIG does not
        include other pertinent statements in the Department’s response to GAO’s report that
        support NMEAF’s practices.

      In the second paragraph of its response to GAO’s report, the Department acknowledges
      the three strategies described in the report that may be used by “lenders and loan holders
      to maintain and even increase their 9.5 percent loan portfolios.” The Department’s
      response does not indicate that it considers GAO’s descriptions of the strategies to be
      inaccurate.

      GAO describes one of these three strategies as follows:

              Lenders can issue a new bond, called a refunding bond, to repay an outstanding
              pre 10/1/93 tax-exempt bond that financed 9.5% loans. Consequently the
              refunding bond finances the 9.5% loans and may have a later maturity date than
              the original bond, allowing lenders to maintain their 9.5% loan volume for a
              longer time.

      Under this strategy, the bond originally issued before October 1, 1993, is not retired or
      defeased, it is refunded. As such, the OIG’s conclusion that NMEAF has incorrectly
      billed the Department for special allowance payments under the 9.5 percent calculation is
      not supported by GAO’s report or the Department’s response to that report.

   5. 	 Taxpayer-Teacher Protection Act of 2004. During the recent development and
        enactment of the Taxpayer-Teacher Protection Act of 2004 (Pub.L.108-409), discussion
        in the House and Senate acknowledged lenders’ ability to extend eligibility for the 9.5
        percent floor calculation by refunding pre-1993 obligations. NMEAF quotes statements
        made by a number of Senators and Congressmen during the drafting of this legislation,
        and NMEAF states—

              . . . there was an agreement that recycling of 9.5% floor loans in pre-October 1,
              1993 tax exempt obligations and tax exempt refundings of such obligations would
              continue unabated (even though some of the members thought it should not but
              conceded the legislation before them permitted its continuance).




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NMEAF concludes that, other than the misclassified amount it identified for the OIG during its
audit (see Finding No. 3), it has been billing the Department correctly for special allowance
payments under the 9.5 percent floor calculation.

OIG Response:

Other than revising certain criteria in Finding No. 1, to reflect our response to a portion of
NMEAF’s comment number 2, we have not changed our finding or recommendations based on
NMEAF’s comments. Our responses to each of NMEAF’s comments on Finding No. 1 are
provided below:

   1. 	 Meaning of “Originally.” The word “originally,” as it is used in Section
        438(b)(2)(B)(iv) of the HEA, is not defined in the HEA, supporting regulations, or any
        sub-regulatory guidance issued by the Department. NMEAF provides no documentation
        to support its interpretation of this term or its view of the legislative history.

       The purpose of the provision in the Omnibus Budget Reconciliation Act of 1993, to limit
       eligibility for the 9.5 percent floor calculation to obligations issued before October 1,
       1993, is reflected in the following publications:

       • 	 The Conference Report for the Omnibus Budget Reconciliation Act of 1993 (H.R.
           Rep. 103-213), which states, “The conference agreement lowers the guaranteed
           special allowance for secondary markets from a minimum of 9.5 percent to the
           special allowance for other lenders.”

       • 	 Dear Colleague Letter 93-L-161 (November 1993), which states, “The minimum
           special allowance rate ‘floor’ on new loans made or purchased, in whole or in part,
           with funds derived from tax-exempt obligations has been repealed.”

       As such, NMEAF’s interpretation of “originally” is contrary to the stated purpose of this
       provision, which was to eliminate the 9.5 percent floor and reduce the amount paid to the
       lender. NMEAF’s interpretation of “originally” would not provide for lower special
       allowance payments to lenders because it would continue special allowance payments
       under the 9.5 percent floor calculation.

       As for the support for NMEAF’s position derived from the “substantially
       contemporaneous statements” of the Department in its Dear Colleague Letters, we can
       find no indication in those letters that the Department interpreted the term “originally” in
       the manner proposed by NMEAF, or that it used such an interpretation as a basis for the
       policy reflected in those letters.

   2. 	 Criteria. NMEAF states that our report ignores the HEA, regulations, and other
        guidance issued by the Department. Specifically, NMEAF states that we ignore Dear
        Colleague Letters that allow continued eligibility for the 9.5 percent floor calculation
        based on the refinancing of obligations issued before October 1, 1993, and that we ignore
        the July 1, 2000, effective date of the 1999 regulations.


                                           Page 11
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      Our report does not disagree with NMEAF’s position on the continued eligibility of a
      loan after it has been transferred as security for a refinancing obligation. However, the
      guidance cited by NMEAF does not support its assertion that a refunding bond’s
      eligibility for the 9.5 percent floor calculation is extended beyond the retirement of the
      original bond. If a loan’s original pre-1993 funding source has been retired, the criteria
      in 34 C.F.R. § 682.302(e)(2)—and all other official guidance issued by the Department
      on the status of loans after the pre-1993 obligation has been retired—provide that the loan
      is no longer eligible for payments under the 9.5 percent floor calculation.

      NMEAF is correct in its assertion that the Department’s regulations to implement the
      October 1, 1993, cutoff date for a loan’s eligibility for the 9.5 percent floor were not
      effective until July 1, 2000. We have revised our report’s discussion of the criteria to
      reflect the date that these regulations were effective. However, we do not agree with
      NMEAF’s suggestion that the requirements in 34 C.F.R. § 682.302(e), for termination of
      a loan’s eligibility for the 9.5 percent special allowance calculation, did not apply to
      special allowance billing before July 1, 2000.

      The requirements in 34 C.F.R. § 682.302(e) were not changed by the final rule that was
      effective July 1, 2000. Both before and after that date, 34 C.F.R. § 682.302(e) provided
      that a loan is ineligible for the 9.5 percent special allowance calculation if it is (1)
      transferred in consideration of funds derived from sources other than a tax-exempt
      obligation subject to the 9.5 percent floor calculation and (2) the prior tax-exempt
      obligation is retired or defeased. The change to the regulations in 2000 was a change to
      the definition of an eligible obligation, limiting eligibility to those obligations originally
      issued before October 1, 1993. This regulatory change incorporated into regulations a
      statutory definition that was effective since the enactment of the Omnibus Budget
      Reconciliation Act of 1993, and confirmed the applicability of 34 C.F.R. § 682.302(e) to
      loans affected by the 1993 change.

   3. 	 Private Letter. In its comments, NMEAF refers to private letter guidance sent on
        November 24, 1993, by the Acting Chief of the Department’s Loan Branch, Division of
        Policy Development, Policy, Training, and Analysis Service to attorneys for the Alabama
        Higher Education Corporation. The guidance in this private letter cannot be used as
        criteria for NMEAF’s practices, because—

          • 	 A private letter issued to one lender cannot be used to justify the actions of
              another; and

          • 	 There is no indication that NMEAF was aware of or relied on this letter when it
              initiated its billing practices.

      As to the internal e-mail, sent by the Department’s policy staff to regional staff on July
      17, 2002, NMEAF has not provided the e-mail in question, so we cannot determine
      whether it supports NMEAF’s position.




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   4. 	 GAO Report to Congressional Requesters. GAO’s report provides the results of its
        study of special allowance payments made under the 9.5 percent calculation and
        describes strategies used by lenders to slow the decrease in, maintain, or increase their
        9.5 percent loan volume. GAO’s description of the refunding strategy used by lenders
        does not address the application of criteria for termination of a loan’s eligibility for the
        9.5 percent floor calculation in 34 C.F.R. § 682.302(e).

       The comments that the Department provided to GAO confirm that certain refunding
       transactions will result in loss of eligibility for the 9.5 percent floor calculation.
       NMEAF’s refunding practice falls into the category identified by the Department, in its
       comments to GAO, of loans that are ineligible for continued 9.5 percent payments.

   5. 	 Taxpayer-Teacher Protection Act of 2004. NMEAF quotes statements made by a
        number of Senators and Congressmen during the debate on the Taxpayer-Teacher
        Protection Act of 2004. However, none of these statements addresses the legality of
        refunding practices, including the practice used by NMEAF. As a result, the statements
        NMEAF provides do not support its position.

Though NMEAF’s comments dispute the criteria for a loan’s eligibility for the 9.5 percent floor,
they do not explain how its loans qualify for the 9.5 percent floor under current criteria, and they
do not dispute our understanding of its loan records, policies, or practices for determining the
eligibility of its loans when billing under the 9.5 percent floor. Our agreement, in part, with one
of NMEAF’s comments (discussed above, in comment number 2), does not change our finding
or recommendation, other than some revisions we made to our discussion of the criteria.

FINDING NO. 2 – NMEAF RECEIVED SPECIAL ALLOWANCE PAYMENTS, UNDER THE 9.5
PERCENT FLOOR CALCULATION, FOR LOANS FUNDED BY OBLIGATIONS THAT WERE ISSUED
AFTER OCTOBER 1, 1993.


NMEAF’s loan records do not indicate that all its loans billed under the 9.5 percent floor
calculation were made or purchased with funds received from eligible sources. We judgmentally
selected 70 student loans from loan balances for which NMEAF billed special allowance
payments under the 9.5 percent floor calculation. Of these 70 loans, 66 were ineligible for the
special allowance payments NMEAF received.

Under 34 C.F.R. § 682.302(c)(3)(i) a loan is eligible for the 9.5 percent floor calculation if it is—

       . . . a loan made or guaranteed on or after October 1, 1980 that was made or
       purchased with funds obtained by the holder from—
                 (A) The proceeds of tax-exempt obligations originally issued prior to
       October 1, 1993, the income from which is exempt from taxation under the
       Internal Revenue Code of 1986 (26 U.S.C.);
                 (B) Collections or payments by a guarantor on a loan that was made or
       purchased with funds obtained by the holder from obligations described in
       paragraph (c)(3)(i)(A) of this section;



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Special Allowance Payments to NMEAF 	                                                      ED-OIG/A05E0017

                 (C) Interest benefits or special allowance payments on a loan that was
         made or purchased with funds obtained by the holder from obligations described
         in paragraph (c)(3)(i)(A) of this section;
                 (D) The sale of a loan that was made or purchased with funds obtained by
         the holders from obligations described in paragraph (c)(3)(i)(A) of this section; or
                 (E) The investment of the proceeds of obligations described in paragraph
         (c)(3)(i)(A) of this section.

The 70 loans we examined were selected from loans that NMEAF identified as eligible for the
9.5 percent floor calculation, in its billing reports for the quarters ended December 31, 2002 (38
loans selected) and December 31, 2003 (32 loans selected). We identified the applicable billing
categories with the largest balances, and from them, in general, we selected loans with large
balances. Of the 70 loans, 66 were either made or purchased well after October 1, 1993, and
funded from proceeds of tax-exempt obligations issued after October 1, 1993. These 66 loans
were not eligible for special allowance payments using the 9.5 percent floor calculation because
NMEAF’s records did not show that these loans had ever been funded by pre-1993 bonds or by
any other eligible funding source described in 34 C.F.R. § 682.302(c)(3)(i).

The 70 loans we selected had an outstanding balance of $1,142,614. The 66 loans that were
ineligible for payments under the 9.5 percent floor calculation had an outstanding balance of
$1,056,402. Though we did not calculate the amount of special allowance payments attributable
to the 70 loans, we used our review of those loans to calculate, informally, the cumulative total
of special allowance payments that, under the criteria, would have been paid to NMEAF, for all
loans, for the five quarters beginning October 1, 2002, and ending December 31, 2003. This
calculation indicates that NMEAF might have received special allowance overpayments of about
$17.2 million for those five quarters.6 (See Appendix C.)

Recommendations:

We recommend that the COO for FSA—

2.1 	 Instruct NMEAF to include only eligible loans, funded by eligible sources listed in 34
      C.F.R. § 682.302(c)(3)(i), in the amounts it identifies for payment under the 9.5 percent
      floor calculation; and

2.2 	 Calculate and require NMEAF to return all special allowance overpayments it received
      after October 1, 1999.

Liability calculations for this finding and for other findings in this report should be consolidated
to ensure that NMEAF is not required to return an overpayment attributable to the same loans
under two or more findings.

6
  The method we used to select the 70 loans does not allow us to calculate a statistically valid estimate of special
allowance overpayments. Our determination of a potential overpayment, based on our judgmental sample, is
intended only for use as a general indicator of the potential effect of NMEAF’s practices for funding loans and
documenting their eligibility for special allowance payments under the 9.5 percent floor calculation. The calculation
is based on an assumption that the judgmental sample is nevertheless reflective of NMEAF’s practices.


                                                   Page 14
Special Allowance Payments to NMEAF                                           ED-OIG/A05E0017


NMEAF’s Comments:

NMEAF strongly objects to this finding and its recommendations. NMEAF states that Finding
No. 2 is based on the same improper criteria as Finding No. 1, “that a tax-exempt refunding bond
cannot extend the 9.5% floor eligibility.” NMEAF has provided, in its response to Finding No.
1, its rationale for the continued eligibility of tax-exempt refunding bonds for special allowance
payments under the 9.5 percent floor calculation. Since NMEAF has shown that “a tax-exempt
refunding bond issue can extend the eligibility for the 9.5% floor treatment, [it has also shown
that] loans residing in and securing such bond issue are eligible for the 9.5% floor treatment.”

OIG Response:

NMEAF identifies its comments on our Finding No. 1 as its response to Finding No. 2, but those
comments do not fully address the condition or criteria we describe in Finding No. 2. The
criteria used for Finding No. 2 are in 34 C.F.R. § 682.302(c)(3)(i), which provides a detailed list
of the funding sources that may be used to identify a loan as eligible for the 9.5 percent floor. As
we describe in our report, NMEAF’s loan records do not document that all loans receiving
payments under the 9.5 percent floor calculation were made or purchased with funds obtained
from listed, eligible sources.

If NMEAF’s objection to Finding No. 2 is based on a belief that Dear Colleague Letters 93-L-
161, 93-L-163(LD), and 95-L-181(LD) consider a refunding bond to be the same as a pre-1993
bond, its belief does not appear to be supported by those letters. Dear Colleague Letters 93-L-
161 and 93-L-163(LD) state—

       Refinancing of obligations which were originally issued prior to October 1, 1993, does
       not alter the eligibility of loans made or purchased with funds obtained from the proceeds
       of the original financing to receive the minimum special allowance.

It is clear that this guidance does not conflict with the criteria we cite in 34 C.F.R. §
682.302(c)(3)(i): it only applies to refinanced loans if they were “made or purchased with funds
obtained from the proceeds of the original financing.”

Dear Colleague Letter 95-L-181(LD) states—

       Tax-exempt loans made or purchased with funds obtained by the holder from the
       issuance, or refinancing, of obligations originally issued prior to October 1, 1993 ("old
       money") will continue to be calculated by taking the greater of one-half the annual
       special allowance rate using 3.5% in the formula, or using the floor of 9.5% less the
       applicable interest rate.

Though the language in this letter seems to consider a refinancing bond to be the same as a pre-
1993 bond, for purposes of determining the eligibility of a loan for the 9.5 percent floor
calculation, the letter’s consistency with other guidance issued by the Department (this letter
states that its guidance “will continue” prior policies) makes this interpretation questionable, and



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34 C.F.R. § 682.302(c)(1), which provides a detailed list of the funding sources that may be used
to identify a loan as eligible for the 9.5 percent floor, make this interpretation unsupportable.

FINDING NO. 3 – NMEAF INCORRECTLY CATEGORIZED A $4.7 MILLION LOAN BALANCE AS
ELIGIBLE FOR THE 9.5 PERCENT FLOOR CALCULATION.


While researching one of our questions, NMEAF discovered that it had assigned an incorrect
bond identification (ID) number to a loan balance of $4.7 million. NMEAF assigns a bond ID
number to each of its loans to identify each loan’s funding source. A loan’s funding source
determines whether NMEAF considers the loan to be eligible for special allowance payments
under the 9.5 percent floor calculation. NMEAF assigned bond ID number 131 to the $4.7
million when the correct bond ID number was 132.

NMEAF considered loans funded by bond ID number 131 to be eligible for special allowance
payments using the 9.5 percent floor calculation. NMEAF did not consider loans funded by
bond ID number 132 to be eligible for such payments. The loans funded by bond ID number 132
also fail to meet the criteria described in Finding Nos. 1 and 2 of this report.

As a result of its error, NMEAF incorrectly billed $4.7 million as eligible for special allowance
payments under the 9.5 percent floor calculation. Because it would be difficult to calculate an
adjustment based on actual outstanding loan balances for each quarter, NMEAF calculated the
amount of the overpayment as if the $4.7 million had been incorrectly billed for each quarter
since February 1998. Using this assumption, NMEAF determined that the amount of the
overpayment was $688,767. NMEAF stated that the overpayment was corrected by an
adjustment it made to its special allowance billing for the quarter ending on June 30, 2004.

Recommendations:

We recommend that the COO for FSA—

3.1 	 Verify the accuracy of NMEAF’s calculation of a $688,767 downward adjustment to its
      billing for special allowance is appropriate for this finding, and

3.2 	 Review FSA’s records to ensure that NMEAF made the downward adjustment to its special
      allowance payments, reimbursing the Department for the overpayment.

Liability calculations for this finding and for other findings in this report should be consolidated
to ensure that NMEAF is not required to return an overpayment attributable to the same loans
under two or more findings.

NMEAF’s Comments:

NMEAF concurs with Finding No. 3. NMEAF states that the Department has reviewed the
method used by NMEAF to identify the error and for calculating the amount of the adjustment,
and the Department has reported to NMEAF that the appropriate adjustment has been made.



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                            OBJECTIVE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine whether NMEAF’s use of tax-exempt obligations to
finance student loans, billed at the 9.5 percent special allowance rate, is in compliance with
requirements in the HEA, regulations, and other guidance issued by the Department.
Specifically, the objective of our audit was to determine whether—

• 	 Tax-exempt bonds issued after September 30, 1993, qualify for financing student loans that
    are eligible for the 9.5 percent special allowance floor rate; and

• 	 Increases in the amount of loans subject to the 9.5 percent special allowance floor are correct.

Our audit covered special allowance billings and the tax-exempt obligations issued and used to
finance student loans during the period October 1, 1994, through March 31, 2004. To
accomplish our audit objective, we—

• 	 Interviewed staff at the Department and reviewed the HEA, regulations, and other
    Departmental guidance on the eligibility of loans for special allowance payments under the
    9.5 percent floor calculation.

• 	 Obtained and reviewed reports of recent reviews of lenders by the Department and the
    Government Accountability Office.

• 	 Obtained and reviewed the Department’s data related to billings for the 9.5 percent special
    allowance rate.

• 	 Obtained from the Department the amount of 9.5 percent special allowance payments to
    NMEAF and the amount of outstanding loan balances included in NMEAF’s quarterly
    reports/billings for the period October 1, 1994, through March 31, 2004.

• 	 Reviewed NMEAF’s Single Audit reports for the years ended June 30, 2002 and 2003. Our
    review included (1) discussions with the external auditor who conducted the Single Audit for
    the year ended June 30, 2003, and (2) a review of the external auditor’s working papers
    related to internal controls, computer systems, and testing of loans included in the special
    allowance section of NMEAF’s quarterly billings. In addition, we interviewed NMEAF’s
    Director of Internal Audit and reviewed selected documents and reports related to the
    computerized loan database system and testing of the quarterly reports prepared from
    NMEAF’s student loan database.

• 	 Interviewed staff at NMEAF to gain an understanding of the process NMEAF used to issue
    tax-exempt obligations and reviewed NMEAF’s policies, procedures, and practices for (1)
    determining the eligibility of loans for special allowance payments under the 9.5 percent
    floor calculation and (2) preparing the special allowance section of the quarterly reports that
    contain loans claimed for the 9.5 percent special allowance rate. Our review did not include
    an assessment to determine whether these policies, procedures, and practices were adequate


                                            Page 17
Special Allowance Payments to NMEAF 	                                         ED-OIG/A05E0017

   to provide reasonable assurance that NMEAF included only loans eligible for the 9.5 percent
   special allowance rate in its quarterly billings.

• 	 Obtained and reviewed the Bond Genealogy, prepared by NMEAF, of all taxable and tax-
    exempt bonds that NMEAF issued from 1985 through 2003.

• 	 Examined transcripts and other documents related to tax-exempt obligations issued by
    NMEAF that were used to fund loans it reported as eligible for the 9.5 percent floor
    calculation. Our audit did not include a determination of whether NMEAF’s obligations
    qualified for tax-exempt status or whether those obligations met any other criteria that are not
    included in the HEA or the Department’s regulations or other guidance.

• 	 Examined NMEAF’s system for maintaining loan records to document its loans’ eligibility
    for the 9.5 percent special allowance rate.

• 	 Reviewed the eligibility of 70 loans judgmentally selected from the loans NMEAF claimed
    for the 9.5 percent allowance rate for the quarters ended December 31, 2002 (38 loans), and
    December 31, 2003 (32 loans). We generally selected loans from the special allowance
    categories with the reported largest outstanding loan balance.

To achieve our audit’s objective, we relied, in part, on data NMEAF used to bill the Department
for special allowance payments. NMEAF used a servicing system created by Idaho Financial
Associates to maintain data and to complete its billing reports. To assess the reliability of
NMEAF’s data, we compared the information for loans included on the quarterly reports for
December 31, 2002, and December 31, 2003, to NMEAF’s computerized loan database and then
to the actual loan source documents for selected loans. Based on our assessment, we determined
that NMEAF’s computer-processed data was sufficiently reliable for the purposes of achieving
our audit objectives.

We conducted our audit in accordance with generally accepted government auditing standards
appropriate to the scope described above. From June through October 2004, we conducted our
work at NMEAF’s offices in Albuquerque, New Mexico, and our offices in Chicago, Illinois;
Kansas City, Missouri; and St. Paul, Minnesota. We discussed the results of our audit with
NMEAF officials on November 4, 2004.




                                            Page 18
       Special Allowance Payments to NMEAF	                                                                               APPENDIX A




                                               NMEAF Bond Genealogy
       The following table was prepared by NMEAF’s Assistant Controller of Bonds and Trusts. In the
       table—

           • 	 “IFA” means “Idaho Financial Associates,” which is the creator of the student loan 

               servicing system used by NMEAF. 


           • 	 “O/S” means “Outstanding”.

           • 	 A “9.5 Refund” or “Refunding” bond is a bond that NMEAF used either to pay off its
               pre-1993 bonds or pay off bonds that refunded those subsequent bonds (for example,
               bonds NMEAF used to refund prior bonds that paid off the pre-1993 bonds). NMEAF
               considers a loan financed by a “9.5 Refund” or “Refunding” bond to be eligible for the
               9.5 percent floor calculation.

           • 	 A “Non-floor”, “New”, or “NF” bond is a bond that provides new money. NMEAF does
               not consider a loan financed by a “Non-floor”, “New”, or “NF” bond to be eligible for the
               9.5 percent floor calculation.


           Bond           Original      Original       IFA      9.5% Amount           9.5% Amount
           Issue         Issue Date   Issue Amount    Bond ID   O/S at 09/30/93       O/S at 03/31/04                     Comments


1985                    8/21/1985        94,925,000 pre-IFA                       0                     0 $53,940,000 o/s & refunded $38m by '93-Two
1987                    4/13/1987        31,745,000 pre-IFA            5,255,000                        0 $5,255,000 o/s & refunded by '95-IV
1988                    7/28/1988        69,740,000 pre-IFA           43,805,000                        0 $43,805,000 o/s & refunded by '94-Three
1988-B                  12/29/1988       71,835,000 pre-IFA                       0                     0 $71,835,000 o/s & refunded by '92-One
1992 A & B              4/14/1992       140,000,000     031         140,000,000                         0
1992 One-A & B          12/17/1992       71,835,000     040           71,835,000                        0 Refunded 1988-B Bonds
1993 Two-A & B          3/30/1993        38,000,000     050           38,000,000                        0 Refunded $38m of 1985 Bonds
1993 I                  9/28/1993       150,000,000 pre-IFA         150,000,000                         0 Refunded by 1994-II & 1995-IV Bonds
1994 Three-A & B        8/23/1994        43,805,000     060       Not Issued                  875,000 Refunded o/s portion of 1988 Bonds
1994 II-A, B & C        3/1/1994         75,000,000     071       Not Issued                 5,385,000 Refunded $75m of 93-I Bonds
1995 IV-	A1 & B         3/1/1995         75,000,000     081       Not Issued               13,720,000 Refunded $75m of 93-I Bonds
1995 IV-A2              3/1/1995          5,255,000     080       Not Issued                 1,975,000 Refunded o/s portion of 1987 Bonds 

1995A-1&2 (ALF)         10/5/1995        10,000,000    N/A        Not Issued           NF 145,000           NEW, Non-floor

1995 A-1 (Refunding)    11/29/1995       15,420,000     090       Not Issued                 2,565,000 Refunded portion of 92-1, 93-2 & 94-3 

1995 A-1, 2 & 3 (New)   11/29/1995       59,960,000     091       Not Issued               14,745,000 NEW, Non-floor

1996 A-1 (Refunding)    8/16/1996        15,900,000     111       Not Issued                            0 Refunded portion of 1992 Bonds 

1996 A-1                8/16/1996        28,300,000     112       Not Issued          NF 28,300,000         NEW, Non-floor

1996 A-2 (Refunding)    8/16/1996         3,560,000     111       Not Issued                 3,560,000 Refunded portion of 1992 Bonds 





                                                              Page A-1
     Special Allowance Payments to NMEAF                                                                              APPENDIX A

            Bond         Original      Original        IFA      9.5% Amount       9.5% Amount
            Issue       Issue Date   Issue Amount     Bond ID   O/S at 09/30/93   O/S at 03/31/04                     Comments
1996 A-2               8/16/1996          9,540,000     112       Not Issued       NF 9,540,000      NEW, Non-floor

1996 A-3 (Refunding)   8/16/1996          2,200,000     111       Not Issued             2,200,000 Refunded portion of 1992 Bonds 


1996 B-1 (Refunding)   9/5/1996         19,140,000      120       Not Issued             9,640,000 Refunded portion of 92-1, 93-2, 94-3 & 94-II

1996 B-1               9/5/1996         30,860,000      122       Not Issued      NF 30,660,000      NEW, Non-floor


                                                                                                   Refunded portion of 92, 92-1, 93-2, 94-3, 94-
1998A-1 (9.5 Refund)   2/24/1998        44,400,000      131       Not Issued            18,000,000 II, 95-IV & 95-A (9.5-floor) 

1998A-2 (9.5 Refund)   2/24/1998        13,400,000      131       Not Issued                        0 Refunded portion of 94-II & 95-IV

1998A-2 (NF Refund)    2/24/1998          2,700,000     132       Not Issued       NF 2,700,000      Refunded portion of 95-A (Non-floor)

1998A-2                2/24/1998        28,300,000      132       Not Issued      NF 28,300,000      NEW, Non-floor

1998A-3 Taxable        2/24/1998        10,000,000      133       Not Issued           NF 0          TAXABLE, Non-floor 

                                                                                                   Refunded portion of 92, 92-1, 93-2, 94-3, 94-
1998B-1 (9.5 Refund)   2/24/1998          6,700,000     131       Not Issued             3,700,000 II, 95-IV & 95-A (9.5-floor) 

1998B-1                2/24/1998          2,500,000     132       Not Issued       NF 2,500,000      NEW, Non-floor

1998C-1 (NF Refund)    2/24/1998          2,000,000     132       Not Issued       NF 2,000,000      Refunded portion of 95-A (Non-floor)

1998 Note              12/1/1998          2,506,250    N/A        Not Issued           NF 0          Refunded by 1999 Bonds 

1999A-1                5/18/1999        23,500,000      142       Not Issued      NF 23,500,000      NEW, Non-floor

                                                                                                   Refunded portion of 92, 92-1, 93-2, 94-3, 94-
1999A-2 (9.5 Refund)   5/18/1999        44,700,000      141       Not Issued             4,800,000 II, 95-IV & 95-A (9.5-floor) 


                                                                                                     Refunded portion of 95-A (Non-floor) &

1999A-2 (NF Refund)    5/18/1999        16,100,000      143       Not Issued      NF 16,100,000      95A-ALF

1999B-1                5/18/1999         9,000,000      142       Not Issued       NF 9,000,000      NEW, Non-floor

1999 Note              12/1/1999         7,000,000     N/A        Not Issued           NF 0          Refunded by 2000 Bonds 

2000A-1                10/17/2000       41,950,000      152       Not Issued      NF 41,950,000      NEW, Non-floor

                                                                                                  Refunded portion of 92-1, 93-2, 94-3, 95-IV

2000A-2 (9.5 Refund)   10/17/2000       22,150,000      151       Not Issued           17,650,000 & 95-A (9.5-floor) 

2000A-3 (9.5 Refund)   10/17/2000       36,400,000      151       Not Issued           10,400,000 Refunded portion of 92, 94-II & 95-IV

                                                                                                     Refunded portion of 95-A (Non-floor) &

2000A-3 (NF Refund)    10/17/2000        9,650,000      153       Not Issued       NF 9,650,000      95A-ALF

2000B-1                10/17/2000       10,000,000      152       Not Issued      NF 10,000,000      NEW, Non-floor

                                                                                                  Refunded portion of 92, 92-1, 94-3 & 95-IV; 

2001A-1 (9.5 Refund)   12/3/2001        54,050,000 160/161        Not Issued           41,500,000 95-A & 98 (9.5 floor)

                                                                                                     Refunded portion of 95-A & 96-B (Non-floor)

2001A-2 (NF Refund)    12/3/2001         5,750,000      162       Not Issued       NF 5,750,000      & 95A-ALF

2001A-2                12/3/2001        35,950,000      163       Not Issued      NF 35,950,000      NEW, Non-floor

2001A-3 (9.5 Refund)   4/1/2002         33,230,000 160/161        Not Issued           33,230,000 Refunded final portion of 1992 Bonds 


                                                                                                   Refunded portion of 93-2; 95-A, 96-B & 98A-
2001B-1 Note (1)       12/3/2001         6,715,000      163       Not Issued             6,715,000 1 (9.5 Floor) 

                                                                                                  Refunded portion of 92 & 95-IV; 96A-1,

2002A-1 (9.5 Refund)   12/9/2002        58,150,000 171/172        Not Issued           58,150,000 98A-1, 2000A-2&3 (9.5 Floor)

                                                                                                  Refunded portion of 94-II & 95-IV; 2000A-3 

2002A-2 (9.5 Refund)   12/9/2002        18,950,000 171/172        Not Issued           18,950,000 (9.5 Floor) 

2002A-2                12/9/2002           100,000      173       Not Issued       NF 100,000        NEW, Non-floor

2002A-3 (9.5 Refund)   12/9/2002        12,200,000      170       Not Issued           12,200,000 Refunded portion of 92-1 & 94-3 

                                                                                                  Refunded portion of 94-II & 95-IV; 96B-1, 

2003A-1 (9.5 Refund)   10/9/2003        22,320,000 181/182        Not Issued           22,320,000 98A-1 & 98B-1 (9.5 Floor)
                                                                                                     Refunded portion of 95-A (Non-floor) &
2003A-1 (NF Refund)    10/9/2003         7,700,000      183       Not Issued       NF 7,700,000      95A-ALF
2003A-1                10/9/2003            30,000      183       Not Issued        NF 30,000        NEW, Non-floor



                                                              Page A-2
     Special Allowance Payments to NMEAF                                                                                APPENDIX A

          Bond              Original       Original        IFA       9.5% Amount       9.5% Amount
          Issue            Issue Date    Issue Amount     Bond ID   O/S at 09/30/93    O/S at 03/31/04                   Comments
                                                                                                        Refunded portion of 98A-2, 99A-2, 2000A-3,
2003A-2 (9.5 Refund)      10/9/2003          54,750,000 181/182        Not Issued            54,750,000 2001A-1 (9.5 Floor)

2003A-3                   10/9/2003           4,790,000     180        Not Issued             4,790,000 Refunded portion of 94-3; 95-A (9.5 Floor)
                                                                         448,895,000        361,820,000

Note (1): The Bond Genealogy, as provided to us by NMEAF, incorrectly labeled the $6,715,000 of Bond Issue 2001B-1 as bond ID# 163 when it should
          have been Bond ID# 160/161.




                                                                  Page A-3
Special Allowance Payments to NMEAF	                                                                                  APPENDIX B




                                      Analysis of Loan Balance Distribution
For the five quarters beginning on October 1, 2002, and ending on December 31, 2003, we
analyzed the loan balances that were identified by NMEAF as eligible for special allowance
payments using the 9.5 percent calculation, and we identified the portions of those balances
attributable to each of NMEAF’s tax-exempt obligations.

The results of our analysis were used to estimate NMEAF’s eligible loan balance for Finding
No. 1. Our estimate includes only the amounts attributable to loans that (1) were not pledged or
transferred as security for a new obligation or (2) could have been funded, originally, by an
obligation that had not been retired. As identified in the table below, our estimate is the sum of
the amounts attributable to—

       1. 	 Pre-1993 Obligations, because the loans that continue to be
            associated with those obligations had not been pledged or
            transferred as security for a new obligation.                                                           $12,545,612

       2. 	 Bond 170, for the quarter ending December 31, 2002, since loans
            associated with that bond could have been funded, originally, by
            an open, tax-exempt obligation that was issued before October 1,
            1993 (Bond 040). Bond 170 paid off the final outstanding
            balance of Bond 040, which was retired on December 9, 2002.
            We have not determined the portion of Bond 170 that was used to
            pay off the remaining obligation for Bond 040, so we have
            calculated our estimate of the revised balance by using the
            maximum loan balance that could have been funded, originally,
            during that quarter by Bond 040.                                                                       + $3,558,209

                                                                                 Revised Balance is                 $16,103,821
  Note (1) The average quarterly balance eligible for the 9.5 percent floor calculation was about $3.2 million.
                                                                     ($16,103,821 divided by 5 quarters). —



                              Original           IFA                 Quarter          Quarter          Quarter      Quarter      Quarter
         Bond                  Issue            Bond                  Ending          Ending           Ending       Ending        Ending
         Issue                  Date              ID                 12/31/02          3/31/03          6/30/03      9/30/03     12/31/03
1985                     8/21/1985             pre-IFA
                                                                   1. Pre-1993 Obligations.
1987                     4/13/1987             pre-IFA
1988                     7/28/1988             pre-IFA

1988-B                   12/29/1988            pre-IFA                 $7,628           $6,812           $6,669      $1,462       $1,315
1992 A & B               4/14/1992               031                                                                                $826
1992 One-A & B           12/17/1992              040               $2,105,195       $1,844,093       $1,698,837   $1,520,681   $1,343,975
1993 Two-A & B           3/30/1993               050               $1,074,707        $912,755         $786,461     $655,851     $578,345
1993 I                   9/28/1993             pre-IFA




                                                               Page B-1
Special Allowance Payments to NMEAF                                                               APPENDIX B
                            Original    IFA          Quarter        Quarter       Quarter       Quarter       Quarter
           Bond              Issue      Bond          Ending        Ending        Ending        Ending         Ending
           Issue              Date       ID          12/31/02        3/31/03       6/30/03       9/30/03      12/31/03
1994 Three-A & B       8/23/1994        060        $2,645,121     $2,352,645    $2,120,092    $1,764,437    $1,563,409
1994 II-A, B & C       3/1/1994         071       $16,704,483    $15,181,316   $13,811,999   $12,235,323   $11,194,907
1995 IV-A1 & B         3/1/1995         081       $20,563,392    $19,075,689   $17,859,729   $16,035,466   $14,810,907
1995 IV-A2             3/1/1995         080             $426           $267
1995A-1&2 (ALF)        10/5/1995        N/A
1995 A-1 (Refunding)   11/29/1995       090        $6,010,942     $5,652,026    $5,354,304    $4,935,756    $4,697,725
1995 A-1, 2 & 3 (New) 11/29/1995        091
1996 A-1 (Refunding)   8/16/1996        111
1996 A-2 (Refunding)   8/16/1996        111
1996 A-3 (Refunding)   8/16/1996        111          $18,989       $197,953      $601,331     $1,129,022    $1,695,531
1996 A-1               8/16/1996        112
1996 A-2               8/16/1996        112
1996 B-1 (Refunding)   9/5/1996         120       $13,701,663    $12,959,046   $12,237,136   $11,485,999    $6,544,105
1996 B-1               9/5/1996         122
1998A-1 (9.5 Refund)   2/24/1998        131
1998A-2 (9.5 Refund)   2/24/1998        131
1998B-1 (9.5 Refund)   2/24/1998        131       $36,847,881    $34,577,370   $32,651,556   $36,312,097   $11,726,248
1998A-2 (NF Refund)    2/24/1998        132
1998A-2                2/24/1998        132
1998A-3 Taxable        2/24/1998        133
1998B-1                2/24/1998        132
1998C-1 (NF Refund)    2/24/1998        132
1998 Note              12/1/1998        N/A
1999A-2 (9.5 Refund)   5/18/1999        141       $45,415,415    $20,524,077   $19,633,255   $18,837,977    $2,657,674
1999A-1                5/18/1999        142
1999B-1                5/18/1999        142
1999A-2 (NF Refund)    5/18/1999        143
1999 Note              12/1/1999        N/A
2000A-2 (9.5 Refund)   10/17/2000       151
2000A-3 (9.5 Refund)   10/17/2000       151       $37,828,013    $38,182,955   $37,656,653   $38,321,023   $23,524,627
2000A-1                10/17/2000       152
2000B-1                10/17/2000       152
2000A-3 (NF Refund)    10/17/2000       153
2001A-1 (9.5 Refund)   12/3/2001       160/161    $40,881,826    $55,185,105   $62,181,659   $65,335,218   $50,652,454
2001A-3 (9.5 Refund)   4/1/2002        160/161    $25,719,007    $26,404,396   $25,917,191   $26,933,742   $26,484,751
2001B-1 Note (2)       12/3/2001       160/161
2001A-2 (NF Refund)    12/3/2001         162
2001A-2                12/3/2001        163                     2. Bond 170
2002A-3 (9.5 Refund)   12/9/2002        170        $3,558,209     $3,943,677    $6,232,194    $9,616,575   $10,271,718

2002A-1 (9.5 Refund)   12/9/2002       171/172                                                $1,723,406    $5,822,748
2002A-2 (9.5 Refund)   12/9/2002       171/172    $33,046,588    $62,105,135   $69,497,488   $67,267,522   $68,148,369
2002A-2                12/9/2002        173
2003A-3                10/9/2003        180                                                                 $2,489,067
2003A-1 (9.5 Refund)   10/9/2003       181/182                                                              $3,000,430
2003A-2 (9.5 Refund)   10/9/2003       181/182                                                             $67,925,131
2003A-1 (NF Refund)    10/9/2003        183




                                                 Page B-2
Special Allowance Payments to NMEAF                                                                              APPENDIX B
                            Original         IFA                Quarter         Quarter        Quarter         Quarter        Quarter
          Bond               Issue           Bond                Ending         Ending         Ending          Ending          Ending
          Issue              Date             ID                12/31/02         3/31/03        6/30/03         9/30/03       12/31/03
2003A-1                10/9/2003              183
                                                 Totals:    $286,129,486 $299,105,315 $308,246,553 $314,111,557 $315,134,259
Note (2): The Bond Genealogy, as provided to us by NMEAF, incorrectly labeled the $6,715,000 of Bond Issue 2001B-1 as bond ID# 163 when
          it should have been Bond ID# 160/161.




                                                          Page B-3
Special Allowance Payments to NMEAF                                                APPENDIX C




                        Potential Overpayment in Finding No. 2
As described in Finding No. 2, we judgmentally selected 70 student loans for which NMEAF
received special allowance payments under the 9.5 percent floor calculation. Our sample was
selected from the loans included in NMEAF’s billing reports for the quarters ended December
31, 2002 (38 loans), and December 31, 2003 (32 loans). We identified the applicable categories
in those billing reports that had the largest balances, and from those categories, selected loans
with large balances.

We determined that 66 of the 70 selected loans were ineligible for the 9.5 percent floor
calculation, because the records for the 66 loans did not show that they had been funded
with the proceeds of a pre-1993 obligation. The 70 loans in our sample had an
outstanding balance of $1,142,614 and the 66 loans we determined were ineligible had an
outstanding loan amount of $1,056,402.

Based on our review of these 70 loans, we calculated, informally, that there might have
been an overpayment to NMEAF of about $17.2 million, for the five quarters from
October 1, 2002, through December 31, 2003. However, since the method we used to
select the 70 loans in our judgmental sample does not allow us to calculate a statistically
valid estimate of special allowance overpayments to NMEAF, our identification of a
potential overpayment is intended only for use as a general indicator of the potential
effect of NMEAF’s practices for funding loans and for documenting loans’ eligibility for
special allowance payments under the 9.5 percent floor calculation. Our informal
calculation is based on an assumption that the judgmental sample is nevertheless
reflective of NMEAF’s practices.

The method we used to determine the potential overpayment is shown in the table below:

                                        Special
   Quarter            Balance        Allowance            Revised       Revised          Potential
    Ending            Claimed              Paid          Balance      Payment        Overpayment
   12/31/02       $286,119,485       $3,556,257       $21,588,159      $268,325        $3,287,932
    3/31/03       $299,105,216       $3,401,772       $22,567,953      $256,669        $3,145,103
    6/30/03       $308,246,554       $3,536,669       $23,257,681      $266,847        $3,269,822
    9/30/03       $314,111,557       $4,042,674       $23,700,205      $305,026        $3,737,648
   12/31/03       $315,134,264       $4,075,277       $23,777,369      $307,486        $3,767,791
Total                               $18,612,649                      $1,404,353       $17,208,296




                                              C-1 

Special Allowance Payments to NMEAF	                                              APPENDIX C

In this table, the column(s) headed—

   • 	 Balance Claimed and Special Allowance Paid contain the actual balance of the loans
       NMEAF reported as eligible for the 9.5 percent floor calculation on its quarterly special
       allowance billing request and the actual amount of the Department’s special allowance
       payment to NMEAF.

   • 	 Revised Balance was calculated by dividing the amounts outstanding for the 70 loans
       ($1,142,614) into the amounts outstanding for the 66 ineligible loans ($1,056,402), to
       identify a potential percentage of ineligible dollars (92.455%). The Balance Claimed was
       then multiplied by the complement of this percentage (7.545%), which is used to identify
       the potential percentage of eligible dollars.

   • 	 Revised Payment was calculated by multiplying the Special Allowance Paid by the
       potential percentage of eligible dollars in our sample (7.545%).

   • 	 Potential Overpayment is the Special Allowance Paid minus the Revised Payment.

   •




                                            C-2 

NMEAF                                                                                             Appendix 0

                                                                                    NMEAF RespolJse to
                                                                                     Draft A lldit Report

  Januaryl3,2005


  Mr. Richard J. Dowd
  Regional lnspeclor General for Audit
  U.S. Department of Education
  Office of Inspector General
  111 North Canal Street, Suite 940
  Chicago, Illinois 60606-7204

  Dear Mr. Dowd:

  As I explained in my correspondence dated December 21, 2004, the New Mexico
  Educational Assistance Foundation (NMEAF) strongly objects to findings #1 and #2. as
  well as the recommendations in the Draft Audit Report (Control Number EO-OIG/AOS­
  EOO I7), which NMEAF received via electronic mail on December 16,2004 and via hard­
  copy on December 22, 2004. In the remainder of this correspondence we will detail our
  position as to why tax-exempt refunding bonds extend the eligibilityof the 9.5% floor
  treatment for special allowance calculations. We have intentionall y nOI addressed the
  issue oflhe transferring of loans from a 9.5"1. floor eligible tax-exempt bond to taxable
  fi nancings and the extension of the 95% floor with. these loans since we do not claim the
  9.5% floor on such. loans.

  Finding 1#3

  NMEAF concurs with Finding 1#3, since prior to the completion of their on site visit we
  pointed out to your staff the incorrect classification of a portion of the 1998 bond issue as
  being eligible for the 9.5% floor special allowance. NMEAF staffhas calculated the
  amount of''95% floor" special allowance received on the loans in the $4.7 million
  portion ofthe bond issue, and has submi ttcd the $688,767 adjustment with its LaRS
  billing for the quartcr endi ng June 30, 2004. The U.S. Department of Education auditors
  from the Dallas Regional Office have reviewed the identification of the calculation
  errors, and the calculation and adj ustment methodology. Their report to NMEAF is that
  they found no issue with the calculation and the adjustment that has already been made.

  Finding 1# 1

  The OIG staff continues to ignore the applicable statute, regUlations, and Department
  guidance on the treatment of refunding bonds. For the position taken by the OIG in
  Finding 1# I to be a«:urate. all regulations and guidance issued by the Department after Ihe
  signing of the Omnibus Budget Reconciliation Act of 1993 would have to be ignored
  The attached correspondence dated January t I, 2005 from Mr. John Keohane, Esq. (our
  bond counsel), along with the attached Appendix and supporting documentation, clearly
  identifi es the legal status ofloans being funded by tax-exempt bonds originally issued




                                          Page 0-1
                                                                                              Appendix 0

prior to October 1993. As his analysis indicates. the treatment of tax-exempt refunding
bonds issued to refund tax-exempt bonds originally issued prior to October 1993 extends
the eligibility for the 9.5% floor treatment in relalion to the special allowance calculation.
For this nol lo be the case, one would need 10 ignore the insertion of the word
"originally" in the draft language proposed in S 1134 and HR 2264 that was included in
the final language in the Omnibus Budget Reconciliation Act of 1993. When this issue
was being considered in 1993, several secondary markets that had 9.5% floor eligible
bonds outstanding pointed out that the bonds would mature long before the loans that
were being held in the bond issue. In addition, some states had limitations on the term of
the bond issues that were shorter than allowed in federal statute. Congress recognized the
problem, and inserted the word" originally" in the final language to specifically enable
refundings of these tax-exempt bond issues and transfer of the loans.

Realizing the potential ramifications of this new statutory language and its interpretation,
especially in light orthe new regulations that had just been issued by the Department
implementing the reauthorization changes of 1988, legal counsel for the Alabama Higher
Education Loan Corporation requested a clarification from the Department's policy staff
in August 1993. The enclosed letter clearly outlines the refunding bonds being
contemplated by the Alabama Higher Education Loan Corporation, and Pam Moran's
response clearly indicates a position that the loans securing the refunding bonds would
continuc to be eligible for the ''9.50/. floor" treatment. This position by the policy staff of
the Department was again reinforced in Dear Colleague Letters #93·L-1 6 1, 9S·IA 8I,
and 96·L-186. In particular, 93· L-161 states thai if the tax-exempt status of the refunding
bond does not change, the bond issue and loans contai ned tbcrein remain eligible for the
9.S% floor treatment.

This position was further solidified when the auditors from the Dallas Regional Office
began to see these 9.50/. floor refunding bond issues at the various secondary markets.
They requested a clarification from the policy slafT at the Department, and received
written confi rmation from Mr. George Harris dated July 17, 2002 that indeed. the
refunding bonds continued to maintain the eligibility for the 9.5% floor treatment.

If we look further at the response of the Assistant Secretary for Postsocondary Education
to the GAO report titled "Federal Family Education Loan Program - Statutory and
Regulatory Changes Could Avert Billions in Unnecessary Federal Subsidy Payments",
we sec that the reference included in the draft report leaves out some important
references. The response referenced indicated in the second paragraph that the GAO
described three strategies employed by lenders and loan holders to maintain and even
increase their 9.5% loan portfolios. Nowhere in the correspondence does the Assistant
Secretary indicate the three strategies described by the GAO arc inaccurate. In fact, the
second strategy indicated in the report stales "Lenders can issue a new bond, called a
refunding bond, to repay an outstanding pre-10I1193 tax-exempt bond thai financed 9.5%
loans. Consequentl y, the refunding bond finances the 9.5% loans and may have a latcr
maturity date than the original bond, allowing lenders to maintain their 9.50/. loan volume
for a longer time." This does not allow for the conclusion reached by the OIG in its Draft
Audit Report since the bond originally issued prior to 101 1193 is not retired or defeased,. it



                                               2
                                         Page 0-2
                                                                                              Appendix 0


is refunded. To concl ude otherwise is not supported by the GAO fi odings or the
Assistant Secretary's correspondence.

Congress entered the d iscussion when it proposed and passed HR 5186. All of the
d iscussion on the House and Senate floon detailed in Mr. Keohane's letter clearly
indicates that Congress recognized the ability fo r lenders to extend eligibility for the
9.5% floor by refunding the bonds originall y issued prior to Qc".ober I, 1993 wi th a tax­
exempt refu nding bond. This ability was cited time and again as a major reason fo r the
legislation. When the President signed HR 5 186 on November 2 1, 2004, this abi lity to
ex tend the term of the 9.5% floo r bonds by any type o f refunding was teml inated as of
September 30, 2004, but clearly existed before th is time.

Finding #2

Findi ng #2 is based on the same fau lty/specious logic, as Finding #1, that being that a
tax-exempt refunding bo nd cannot ex tend the 9.5% floor eligibility. The analysis of the
70 loans in this finding concluded that a majority of the loans sampled were improperly
billed for the 9.5% floor special allowance since they resided in a tax-exempt refunding
bond that was issued after October 1993. Since I have clearly outlined the argument
regarding the e ligibility of the tax-exempt refunding bonds for the 9.5% floor treatment in
the detail under Finding "1, it wou ld be oflittle import to outline the same argument
again. Suffice it to say that if a tax-exempt refunding bond issue can extend the
eligibility for the 9.5% floor treatment, loans residing in and securing such bond issue are
eligible fo r the 9.5% floor treatment.




                                              J

                                        Page 0-3
                                                                                            Appendix 0

Recommendations

NM.EAF strongly objects 10 the recommendations identified in the Draft Audit Report.
Our objection centers on the position that, except for the loans misclassi fied as 9.5% floor
eligible in error, NMEAF has been billing the Department correctl y for the 9.s~o floor
loans. There are no further instructions required by the COO, and there are no
adjustments to be calCUlated.

In closing, we assert that the 010 staIT has ignored the statutory construct, applicable
regulations, and Departmental guidance to arrive at Finding #1, #2, and its
recommendations. This, even after NMEAF provided rererence to the applicable
regulations and guidance in a letter from our bond counsel and during our exit interview.
To continue to take this position in the face of the facts and legal documentation goes
beyo nd the point of being a misunderstanding to being reckless.

If you have any questions regarding our response or our bond counsel's letter with
attached Appendix, please feel free to contact me at 505.761.2010or via e·mail at
far1>ere@nmstudentloans.org.



~~
E~oody"Farber ~
President

CC:     Ms. Sally Stroup
        Ms. Terri Shaw
        Mr. John Keohane, Esq.
        Mr. Reginald Storment, Esq.




                                              4

                                        Page 0-4
                                                                                                              Appendix D



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                                          J2.nu2.ry 11 .2005               .John J. Keoh_
                                                                           /111)506-5240
                                                                           J~ .com

PtliIVlI.EGED AHD COHFIO£HTIAL

Me. Elwood Farber
President
New Mexico EduaUon:al Assisunce: Founduion
7400 T iburon
Albuquerque, NM 87109


                           Re:   New Mnico Education Alsisfllncc Founw.tion
                                 US. Dcputment o f Education
                                 Inspector General
                                 DllI.ftAudit Rcpon - ED - O IG/A05-EOO t 7
                                 December 2004

Deu Mr. Fatbcr:


                We .rc writing in response to your request th.t .s yow- CO\IJlsc\ we review :and
conunent upon the .bove captioned draft report o f the U.S. Department o f Education's Office: of
Inspector General entitled "Audit of Special AIlow.nce P.yments to New Mexico Educ:atiOfal
Auisunce Fo undation". In particular you h.ve directed ow- 2.ncmio n to Findings No.1 .nd No.2
of such draft repon. Finding No.3 is • finding discovered by the Founw.tion .nd reported by the
Foundation to the Office of the inspeclor G eneral.

               In the course of our review, we h2.ve reviewed.n exception report as to 9.5% Speci.aJ.
AlIow.nce (wh.t we underw.nd to be in the nature of a pre-dra(t draft) by the Office of the
Inspector General, to which the Foundation responded earlier by youe leuer and our letter of
Augu$t 26, 2004 to you (. copy of which we undusrand was delivered by you to the Office of the
InspeClo r General).

                As noted in ow- letter of August 26, 2004, it is our undenunding th.t (except for the
insunce described in finding No.3) .t no time did the Fowubtion bill the 9.S-;. floor rale on any
loan which wu not. loan I1l2de or purchased with funds from the proceeds of ux exempt
obligations issued. prior 10 Ocmbc.r I, 1993 o r from ux exempl refundings o fsuch oblig:Jotioll5.




                                              Page D·5
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Mr. Elwood Farber
Januuy II , 2005
Page 2

               For the reasons set forth below and in the accompanying A p~nclix, we advisc you
that we believe the Foundation's actions as referenced in the prior parngnph are wholly consistent
with the provisions of 20 USC §1087-1 (b)(2)(D) (I) through (Iv) and to the extent the Dnft Audit
Report takes exception to such actions the Office of the Inspecto r Gener:al is in cuoc.

              The major enOl is that it docs not apply the statute, i.e., 2Q USC §t087-1(b)(2)(B)(iv),
to determine which loans d2..nm receive the 9.50/. floor rate:

                        Iollos which are financed with funds obWfied by the holdu
                        from the issuance of oblig3tions originally issued on or aftu
                        October 1, 1993 ....

                  The Office of the Inspector General ignores lhe word "originally" or treats it as
redundant. Indeed, in their reading there is no difference if the provision read "ociginaUy issued" or
''issued'' find in doing so the Office violates one of the nuin rules of statutory construction, i.e., 111
give each word effect. No less a body than the Supreme Court noted that in ltarutory construction
it was ill duty to give effect, if possible, to evety clause Ind word o f a stature. United States v.
Menascbc. 348 US 528, 538-539 (citing to Montclair v. Ramsden. 107 U.s. 147, 152. Sec also " ...1.
statute ought, upon the whole, 10 be 50 construed tluit, if it can be prevented, no cbuse, sentence, or
word lhall be superfluous, void or insignificant" ~ v.~, 533 U.s. 167, 121 S. Ct. 2120,
2125 (2001). In ow: earlier letter to the Founwtion (wh.ieh we undentand wu forwarded to the
Office of the Imp«lOr GeneW) we noted our participation in discussions in 1993 with
representatives of the Congress in which the need to penni! rcfundings wu specifically addressed
and the word "origUully" was insetted fO[ the purpose of having the 9.5-/0 floor apply to loans
linan«<l by the tax exempt refundings. We can undel"Stand that the Office of the Inspector General
might not be willing to accept our word on this but we assume that th e circumstances described
should be verifl2ble from pre-introduction drafts of the legisbtion.

               Additionally, if th e Office of the Inspector Genef'lll is unwilling or unable to accept
our rep«:sentation that tax-exempt refundings were specifically discussed and intended to be eligible
for the 9.5% floor rate, why will it not accept the substantially contemporaneous statements of the
Department of Education set forth in the November 1993 Dear Colleague Letter (93-1..--161), the
December 1993 De:u Colleague Letter (93-L-163(l.D» or the June 1995 Dear CoUcague Letter (95-
L-181(lD», all of which reiterate how floor tleatment will .pply to loans refinanced by post
October 1, 1993 tax ellempt obligations u described in the atuchcd Appendix?




                                               Page 0-6
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Mr. Elwood    Far~r
January 11,2005
Page 3


                Or failing that, how does th e Office of th e Inspector <kneral account for the
correspondence ~tween counsel for the Alabama Higher Education Loan CorpoClition and the
Department (Octo~ r-Novem~r, 1993) in which the Department clearly agreed that a post October
1, 1993 u.x exempt refunding of pre-Octo~t 1, 1993 u.x exempt obligations wouJd continue to
qualify loam financed by the refunding issue for 9.5% floor ttuunent ?

                We do acknowledge tha t the Office of the Inspcc;:tor General does attempt to apply
to the 1993 amendments provisions of the pre-c:xisting 1992 regulations without attempting to
deteanine whether the 1993 amendment provisions changed the c:ircwnsu.nces addressed by the
1992 regulations and furthcr the Office of the Inspector General applies to the 1993 amendment
provisioru of the 1996 Dear CoUcaguc Letter which spcci6caUy ,tlltes that it docs not apply to
Stlltutory amendments subsequent to 1992.. As Sytherla nd on StaNtcuy Construs:tioo (Statutes and
Statutory Construction - Sixth Edition - 2000 Revision) notes under "Administrative Regu1ations,"
p l :6 (page 726): "No deference to a fo nner intetpretlltion by an administrative agency can control
where the interpretlltlon is in conflict with a subsequently enacted legislative mandate." The
Supreme Court hu addrcsKd tlW w uc in rclalion to Tn.;uwy rcguhtion~: "'Tro;;uwy rcgulatio05
and interpretations long continued without substantial change, ap#Jr"" 111 1I110000lltkd til" IIIbstmtliol!!
fH~d slaiN/IS, :are deemed to have received congrcssK)Oal approval and have the effect of law" ,
ll.S. v. Cleveland Indians BwbiU Co.. 532 US. 200, 12 1 S. C1. 1433 at t445 (2002) (emphasis
added), citing to Cottage Savings Assn v. Commissioner, 499 US. 554, 561, 11 t S. C1. 1503 (199 1)
citing to u.s. v. C2&:Wl, 389 U.S. at 305-6, 88 S. C1. 445 (1967). The Supreme Court application
clearly supports the position in Sytherland with rCllpcct to an amended stlltute , uch as we have here.

                AdditionaUy, the Office of the Inspector General does not dctennine but rather
assumes that the 1992 regulations arc valid even though the effect of such regulations are to apply
the one- half special aUowance rate cstllblished pursuant to 20 USC §I087-1(b)(2)(B)(i) with respect
to loam made or purchased with funds obtained by the holder u om the issuance of obligations the
income ftom which is exempt from tlllation under Title 26 to those obtained from the issuance of
obligations o ther than those the income from which is exempt from taxation under Title 26.

               That the Department may have thought it had good financial rcasons (an
anticipation of rising interest rates) for making this change (as discussed on page 34 of the GAO
Report refetenced in the Appendix hereto) does not change the fact thaI the Department was not
authorized to go beyond o r cha.nge the staNte. The Department may not by regulation amend a
su.Me or add to a statute something which is nOI there. Caljfornia Cosmetology Coalition v. B..ik):.
11 0 Fld 1454, 1460 (9th Cit. 1997).




                                                Page 0-7
                                                                                                    Appendix D
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Mr. Elwood Farber
Janw..ry 11, 2005
Page 4


               As noted in the Appendix, during the discussion on HR 5186, in both the HouiH: and
~ nate, thert was agreement that recycling of9.5'"1. floor loans in pre.October I, 1993 tax exempt
oblig:ttions and t2X exempt refundings of such oblig:ttion5 would continue unabated (even though
some of the members thought it should nO! bUI conceded the legislation before them pennittcd its
continuance).


              Based on the above, we again state the dIllfl audit report is in scnow error and does
not comport with the applicable provisioru o f the Higher Education Act.

               We assume you will be delivering II. copy of this letter to the Inspector Genc.ral
                                                       Very truly youn.,



                                               8!:J~~




                                             I'age D-8
                                                                                                             Appendix 0
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                                                                                Privileged IDd Confidentia l

                                     APPENDlX ON 9 If2'Y, FLOOR


               Student loans m ade or insured on or after Oct,>ber I, 1980 ''which were made or
purchased with funds obtained by the holder from the issuance of obligations, the income from
which is exempt from taxation under Title 26" have. pursuant to the provisions of 20 USC
§ 1087.1(b)(2)(B)(ii), generally been entitled to an effective rate of return of not less than
9 112%' (the so-called " floor"). Amendments oflhis provision in 1992 simplified the formula
but did not change the floor.

              In 1993, as part ofthe Omnibus Budget Reconciliation Act of 1993, Pub. L 103.
66, the Congress detennined to terminate the floor provision prospectively for loans " financed by
funds obtained by the holder from the issuance of obligations originally issued on or after
October t, 1993, the income from which is excluded from gross income under the Internal
Revenue Code of 1986" 20 USC § 1087- I(bX2XB(iv).

               Prior to the introduction of the 1993 amendments representatives of the tax
exempt student loan bond issuers, either non-pro fits or state agencies, and their ooW1SCl, had
discussions with Congressional representatives about the proposal during which it was noted that
bonds then outstanding that had been issued (due to the prevailing interest rate m arket) for
periods insufficient to amortize the student loans would have to be refunded and if the proposed
amendment did not take such refundings into consideration, bond defaults were likely. To meet
this concern, the word "originally"' was inserted prior to "issued" to "grand-father" tax exempt
refunclings which relate back to the date of original issuance under the Tax Code.

                The Officc of the Inspector General ("OIG") of the United States Department of
Education (the "Department'') has recently taken and attempted to enfon:e an in terpretation of
the impact of 20 USC § 1087-I(bX2)(BXiv) which is directly counter to the history o f such
legislation (a matter which should be verifiable by the OIG), contemporaneous and subsequent
interpretations of such provisions by the Department, recently stated interpretations by members
of the Congress and the rules of statutory construction.

                                       Departmenl lnlerpretatlo os

November 1993 Dear Colleague Letter (93-1..-16 1)

               The stated purpose of such letter was to provide the student loan communi ty with
infonnation on the major changes mandated by the Omnib us Bud8et Reconci liation Act of 1993
(Pub. L. \03-66) signed into law on August 10, 1993. In its cover letter, the: Department noted:
Whi le some changes are self-implementing and supersede current regu lat ions, other changes w ill
require that new regu lat io ns be published."



• Loans mMk or imurcd OIl or.fter Octobet 1, 1980 ffornc:lc"1'l obligations received OI!ly balflhe standard $p«~1
.tlowaocc pII)'IlIC'nt. S«;.1so Fcdenol Regi$terNol. 57, Dec:lCni1cr 18, 1992,)4 CfR 1682.)02.




                                                   Page 0-9
                                                                                               Appendix 0

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              On page 13 of such letter under the caption "Special allowance payments
§438(bX2)" it is stated:

               The minimum special allowance rate "floor" on new loans made or
               purchased, in whole or in pan, with funds derived from tax-ex.empt
               obligations has been repealed. Accordingly, loans made or
               purchased with funds obtained by the holder from the issuance of
               obligations originally issued on or after October I, 1993 (or other
               related sources] no longer qualify to receive the minimum special
               allowance. Refinancing of obligations which were originally
               issued prior to October I, 1993, does not alter the eligibility of
               10anli made or purchased with funds obr.ained from the proceeds of
               the original financing to receive the minimum special allowance.
               (Both "originally" and "on or after October I , 1993" in the second
               prio r sentence are italicized in the Dear Colleague Leiter.]

RC!loonse to Allblml HJ1!ber Educltion Loan Corporllion

               On October 13, ·. 1993, counsel to the Alabama Higher Education Loan
Corporation (the "Corporation} sought guidance from the Department as to whether certain
eligible loans financed "from the. issuance, of tax-ex.empt obligations originally issued prior to
October I, 1993" would be eligible (or the special allowance rate based on Section
438(bX2)(BXi) and (ii) of the Higher Education Act [20 USC §1087-I(bX2XBXi) and (ii)] since,
the Corporation posited ''they would not be eligible for the (ull special allowance rate (without a
floor) provided for in Section 438(bX2){BXiv) of the Higher Education Act (20 USC § 1087-
I(bX2)(BXiv)]" upon their refunding and retirement by the issuance of post-October I, 1993 tax
exempt obligations.

              On November 24, 1993, Pamela A. Moran, Acting Chief, Loans Branch, Division
of Policy Development. Policy, Training, and Analysis Service o(the Department, responded:

               you indicated that the Alabama Higher Education Loan
               Corporation... intends to issue "tax-exempt" refunding bonds to
               redeem or otherwise retire the three original obligations, specified
               in your letter, each of which was issued prior to October I, 1993.
               Based on the facts presented in your letter, we concur that the
               special allowance rates will continue to be delennined pursuant to
               §§438(bX2){BXi) and (ii) of the Higher Education Act of 1965, as
               amended."

               Neither the request nor Ihe response ciles 10 the pre-J993 regulations.




                                                -,-
                                            Page 0-10
                                                                                          Appendix D

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December 1993 Dear Colleague Letter (93-kI6J£LD))

              This leltcr contained infonnation and provided guidance on the changes made by
the Omnibus Budget Reconciliation Act that affected the Lender's Interest and Special
Allowance Request and Report. Part IV thereof, under the caption "Special Allowance" used
language substantially the same as thaI used in the November 1993 Dear Colleague Letter c ited
above:

              The minimum special allowance rate "floor" on new loans made or
              purchase, in whole or in part, with funds derived from tax.:cxempt
              obligations has been repealed. Accordingly, loans made or
              purchase with funds obtained by the holder from the issuance of
              obligations originally issued on or after October I, 1993 [or certain
              funds deri ved therefrom] no longer qualify to receive the minimum
              special allowance.       Refinancing of obligations which were
              originally issued prior to October I, 1993, does not alter the
              eligibi lity of loans made or purchased with funds obtained from the
              proceeds of the original financi ng to receive the minimum special
              allowance.

              Thb guidance did nOi cite to the pre-/993 regulations.

Juue 1995 Du r C ollna;uc Leucr (95-kJ8ICLD»

             This leiter provided instructions for reporting the changes required by the
Omnibus Budget Reconci liation At of 1993. In such leltcr the Department distinguished
between "new money" and "old money".

              A new special allowance category (SH) has been added for loans
              made or purchased with funds obtained by the holder for (sic) the
              issuance of obligations originally issued on or aller October I,
              1993 ("new money',)...

               Tax exempt loans made or purchased with funds obtained by the
               holder from the issuance, or refinancing, of obligations originally
               issued prior to October I, 1993 ("old money'') will continue to be
               caiculated by taking the greater of one-half the aMual special
               allowance rate us ing 3.5". in the fonnula, or using the floor of
             . 9.5% less the applicable interest rate. (italics added)

               This guidance did nat cite to the pre- 1993 regulations.




                                                ·3·

                                            Page D-II
                                                                                              Append ix D

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Ma rch 1996 Dear Colleague Letter (96-[", 186)

                The subject of this leiter was stated as "[c]larification and interpretive guidance
on certain provisions in the Federal Family Education Loan (FFEL) Program regulations
published on December 18, 1992. It is the response to question 30 thereof which has given rise
to the "glitch" or "loop hole" in the Higher Education Act which was the intended target of the
provisions ofH.R. 5186 recently enacted.

               What this Dear Colleague Letter by its own tenns does not dQ is attempt to clarify
or interpret any of the provisions of the Omnibus Budget Reconciliation Act of 1993 and
specifically not any of the provisions of the floor. As stated in its preamble, the letter only
covers changes made by statutes enacted prior to 1993.

               The question and answer are as follows:

               30. Section 682.302(e), which pertains to e ligibility for special
               allowance for loans made or acquired with obligations on which
               the interest is exempt from taxation (tax-exempt obligations), has
               been revised in the 1992 regulations. What is the significance of
               the change and which is the effective date of the ehange?

               Section 682.302(e) was revised to reflect a shift in the
               Dqlartment's policy regarding loans made or acquired with the
               proceeds of tax-exempt obligations. 1be regu lations in effect prior
               to December 18. 1992 slated that a lender was paid special
               a llowance on a loan made or acquired wi th the proceeds of a lax·
               exempt obligation based on the rules applicable to loans financed
               with taxable obligations and the prior tax-exempt obligation was
               retired o r defeased. The regulations were silent as to the method of
               calculating the applicable special allowance rate for a loan made or
               acquired with a tax-exempt obligation that was subsequently
               refinanced with. the proceeds of a taxable obligation, but the prior
               tax-exempt obligation remained outstanding. The Department's
               prior guidance stated that the current funding source defined the
               applicable special allowance provisions - if a loan was financed
               with the proceeds of a tax-exempt obligation, the tax-exempt
               special allowance ru le applied. If the loan was financed with the
               proceeds of a taxable obligation, the taxable special aJlowance
               rules app lied.

               In the December 18. 1992 regu lations, the Department changed
               this policy. Under the regulations. if a loan made or acquired with
               the proceeds of a tax-exempt obligation is refinanced with the
               proceeds of a taxable obligation, the loan remains subject to the
               tax-exempt special allowance provisions if the authority retains

                                                -4-

                                            Page D-12
                                                                                            Appendix 0

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              legal interest in the loan. If, however, the ori ginal tax-exempt
              obligation is retired or defeased, special allowance is paid based on
              the ru les applicable to the new funding source (taxable or lax­
              exempt).

              This change is effective as of the effective date of the 1m
              regulatio ns, February I, 1993, and applies to all loans transferred
              from a tax-exempt obligation to a taxable obligation on or after
              that date.

              Adjustments to ED 799 billings and current billings for any loans
              covered by this policy should be made issuing the applicable tax­
              exempt special allowance codes for the periods that the holder
              retains legal interest in the loan and the original tax-exempt
              obligation has not been retired or defeased.

               Since the analysis in the answer was based on the Higher Education Act as it pre­
dated the 1993 amendments, it did not incorporate such amendments or the guidance in any of
the above referenced Department documents.

August 3. 1999 Proposed Rule

                On August 3, 1999, the Depanmenl published a notice of proposed rulemaking
purportedly to implement changes made to the Higher Education Act of 1965 by the Higher
Educatio n Amendments of 1998. but included in such proposal was the first rulemaking. with
respect to the implementation of 20 USC §1087- l(b)(2)(BXiv).

              Sec: Federal RegisterNol. 64, No. 148, Tuesday, August 3, 1999/Proposed Rules,
p. 42 176.

              Under its Proposed Regulatory Changes, the Dcpanmcnt stated:

              [T]hcse proposed regulations also reflect the changes made to the
              HEA relating to the special allowance calculation for loans made
              or purchased with the proceeds of the tax-exempt funds. More
              specifically, these proposed regulations specify which loans
              qualify for the minimum (or floor) special allowance rate and are
              subject to the 50 percent limitation on the maximum special
              allowance rate. 42179

              The proposed rule contemplated amending Section 682.302 of the regulations by
adding a provision (c)(3XiXA) thereto prov iding that loans funded from :




                                               -5-

                                          Page 0-13
                                                                                             Appendix 0
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               [I)he proceeds of tax-exempt obligations originally issued prior 10
               October I, 1993, the income from which is exempt from taxation
               under the Internal Revenue Code of 19867 [po42 190]

would qualify for the minimum (or floor) special allowance rate and arc subject to the SO percent
limitation on the maximum special allowance rale. [po 42 190J The proposal cont inued in (cX4)
thereof to make clear that:

               [IJoans made or purchased with funds obtained by the holder from
               the issuance of obligations originally issued on or after October I,
               I99J ...do not qualify for the minimum special allowance rale
               specified in paragraph (c)(3)(iii) orthis section, and are not subject
               to the SO percent limitation on the maximum rate otherwise
               applicable to loans made with tax-exempt funds . [po 42 190J

October 29.1999 Final Rules

              On October 29, 1999, the Department published its final rules on 34 eFR Part
682, see Federal RegisterNol. 64. No. 209lFriday, October 29. 1999lRules and Regulations. p.
58622, with the provisions of Section 682.302 as 10 the Iloor/non-Iloor as set ronh in the
Proposed Rules.

September 2091 UDiled St_ta GoverumeDl ,;'P:1luut_loility O ffice Repyrt

                ht response to a request from Members or the House or Representatives., the
United Stales Government Accountability Office \GAO',) on September 20, 2004 issued its
report entitled: "Fedeml Family Education Loan Program - Statutory and Regulatory Changes
Could Avert Billion in Unnecessary Federal Subsidy Payments" (the ''GAO Report'').

               The GAO Report notes: "[tlhe primary factor influencing the increase in special
allowance payments has been the sharp decline in interest rates paid by borrowers relative 10 the
minimum 9.S percent guaranteed yield for lenders". GAO Report, p. 3. Increasing floor loan
volume was also a factor and the GAO rerers to the methods or increasing such volume as
"recycling, refunding and transferring", GAO Report, p.4, which the GAO explains as rollows:

               First, after paying costs associated with a pre-October I, 1993 tax­
               exempt bond (such as payments or interest and principal to bond
               investors), lenders can reinvest, or recycle, any remaining money
               earned rrom 9.5 percent loans to make or purehase additional loans
               that, under the law, are also guaranteed a minimum 9.S percent
               lender yield, Using this method, lenders are able 10 slow the
               decrease in, maintain, or slightly increase their 9.5 loan volume.

               Second, lenders can issue a new bond, called a refunding bond, to
               repay the principal, interest, and other costs of an outstanding pre-




                                            Page 0-14
                                                                                          Appendix 0

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              October I, 1993 tax-exempt bond. Based on how the HRA has
              been interpreted, 9.5 percent loans originally financed with a pre.
              October I, 1993 tax-exempt bond, but subsequently financed by a
              refunding bond, continue to carry the government guaranteed
              minimum yield for lenders of 9.5 percent.           Moreover, the
              refunding bond may have a later maturity. or payoff, date than the
              original bond. Using this method, lenders can main tain thei r 9.5
              per cent loan volume.

              Third, under Education regulations, a lender can significantly
              increase its 9.5 percent loan volume by issuing a taxable bond and
              using the proceeds to purchase 9.5 percent loans financed by a pre.
              October I , 1993 tax-exempt bond. The lender then uses the cash
              available from the pre-October I, 1993 tax-exempt bond to make
              or but additional loans, which are guaranteed the minimum 9.5
              percent yield. Under regulations issued in 1992, the loans
              transferred to the taxable bond continue to be guaranteed the
              minimum 9.5 percent lender yield, so long as the original bond is
              not retired or defeased.       (At the time the regulation was
              promulgated, Education anticipated that interest rates would rise,
              resulting in a higher lender yield for loans financed with taxable
              bonds than for loans financed wi th tax-exempt bonds. Education
              believed that if the 1992 regu lation was not promulgated, lenders
              would have had an incentive to transfer loans from tax-exempt
              bonds to taxable bonds in order to obtain a higher yield, thus
              resulting in higher special allowance payments for the
              government.)

                                         ".R. 5186
House or Representatives

               H.R. 5186 "An Act to reduce certain special allowance payments and provide
additional teacher loan forgiveness on Federal student loans", passed the House of
Representatives on October 7, 2004 and the Senate on October [9), 2004 and was signed into law
by the President on October 30. 2004 as P.L 108-409.

              Mr. Boehner of Ohio, Chainnan of the Education and the Workforce Committee,
described what H.R. 5186 would not do:

              Now there are some who say Ihis bill does not go far enough.
              They contend it should shut down subsidies retroactively.
              Congressional Record, October 6, 2004, H 8321.



                                              .,.
                                         Page 0-15
                                                                                          Appendix 0

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             Mr. Miller of Califomia, Ranking Member o f the Education and the Workforce
Committee, addressed a similar theme:

             Buttragica1ly tonight we only answer a pan of that call becau$C we
             do not deal with those provisions in this program that continue
             these unconscionable profits at the 9.5 percent loans due to the
             recyt:ling. We are going to stop this loophole for this year, and we
             ought to stop the recycling. This is not retroactive. Congressional
             ~ October 6, 2004, H 8322.

             Mr. McKeon of California, Chainnan of the Subcommittee on 21st Century
Competitiveness of the Education and Workforce Committee stated:

             The bill before us is the first step to pennanenUy ending the 9.5
             percent speciaJ allowance subsidy.... Prospective changes like
             those in the bill before us will ensure the loophole is shut down
             without jeopardizing student benefits.        1be GAO recently
             recommended Congress put an end to the excess loan provider
             benefits with prospective changes. That is because the GAO
             recognizes that retroactive changes would hann students by
             reducing borrower benefits. Congressional Record. October 6,
             2004, H 8322.

             Mr. Kildee of Michigan (one of the requesters of the GAO Report) stated:

                     However. it is important that Members understand that this
             bill has two major deficiencies. First of all, it does not completely
             close the loophole which lenders have been exploiting. It keeps on
             "recycling". Con gressional Record, October 6, 2004, H 8323.

             Mr. Van Hollen of Maryland (the other requester of the GAO Report) stated:

               .. I introduced an earlier bill ... tllat would close the 9.5 percent
             loophole pennanently, completely, immediately and prospectively,
             not retroactively.... Unfortunately. we have not had an opportunity
             in committee or on this floor to deal with that bill that would
             address the problem fully and pennanently .... But when we take
             a look at the bill., it has two very serious problems ....Secondly, it
             does leave a big part oflhe loophole in place. It would continue to
             permit lenders to make 9.5 percent eligible loans using the
             proceeds from existing 9.5 percent.eligible loans through a scheme
             or process called recycling. Congressional Record, October 6,
             2004, H 8324.

             Ms. Jackson·Lce of Texas:

                                               -8-

                                          Page 0-16
                                                                                Appendix 0

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                 The bill conlinues a current lender practice typically
         referred to as ''recycling'', Recycling invo lves lenders us ing the
         interest payments from student borrowers and the excessive
         subsidies paid by the Federal gov.:rnment to make new loans
         which also receive a guaranteed 9.5 percent rate of return.
         Congressional Record, October 6, 2004, H 8325

         Mr. Holt of New Jersey:

                 Let me just review what this bill does. I rise in support of
         H.R. 5 186. It is an improvement over the current law. But it fails
         to address the problem. It ignores the Government Accountability
         Officer's reconunendation to immediately stop lenders from
         issuing new loans at 9.5 percent. CQngressional Record, October
         6, 2004, H 8325

         Mr. MillerofCaliforrua:

                 But what happens with this legislation is, while hiding
         behind a legitimate claim by nonprofits, they keep open that
         recycling loophole that is overwhelmingly used, according to the
         General Accountability Office, by fot-profit lenders. Nothi ng to
         do with retroactivity, because we stop this practice in the future,
         and we can stop recycling in the future. Congressional Record.
         October 6, 2004 H 8326

         Mr. Boehner of Ohio:

                And while I know that people want to go all the way and
         shut it down and be really tough, what about those nonprofit
         student aid organizations around the country who have these loans,
         who use those excessive profits 10 help low-income students and
         mostly mi nority students from all over the country? Congressional
         ~ October 6, 2004




         Mr. Kennedy of Massachusetts:

                 Mr. President, this bill deserves to pass, but it's only a
         down-payment on the real reform needed to close a flagrant
         loophole in the student loan program...because it does nol close all
         of the notorious 9.5 percent student loan loophole .... Sadly, under
         this Republican bill, the abuse will continue. New loans will be



                                         ·9·

                                     Page 0-17
                                                                                    Appendix 0

 o
ORRICK


         made to students that taxpayers will subsidize at a 9.5 percent
         interest rate.

         In 1993, Congress passed legislation intended to phase-out of
         existence the 9.5 percent bank guaranty. But two key loopholes
         have kept that subsidy alive alld well. The legislation before the
         Senate doses one.

                 The first loophole - the one that isn't closed by this
         legislation - allows for what is called 9.5 percent loan ''recycli ng''.
         Congressional Record, October 9, 2004, SI0920

         Mr. Reed of Rhode Island:

                [A] grandfather clause was enacted for outstanding 9.5
         percent return, tax-exempt bond generated student loan funds.
         Rather than end the 9.5 percent loans, this grandfather c lause has
         worked as a loophole. Owners of 9.5 percent guaranteed loans
         continual ly recycle proceeds from' tax-exempt bonds originally
         issued before 1993 - creating in effect a revolving loan fund - and
         the Federal Government continues to guarantee a 9.5 percent rate
         of return . . .. Regrettab ly, the bill before us today does not
         contain such a comprehensive and permanent fix . This more
         limited effort provides only a temporary I.year solution and it
         continues to allow ''recycling" ofloans. as opposed to the bonds.. .
         . Congressional Record, October 9, 2004, S 10921 .

         Mrs. Murray of Washington:

                 [T]he Gregg b ill does not fully close the loophole. This
         subsidy would still live on. My bill says that lenders cannot create
         new loans at 9.5 percent. No new subsidies·period .... But the
         Republican bill is not a real fix. It does not stop these gimmicks
         entirely. In many cases, lenders could keep writing new loans at
         9.5 percent for decad es. Congressional Record, October 9, 2004, S
         10921.




                                           -HI-

                                      Page 0-18
                                                                                                                                                    Appendix 0



                                                                EXHIBITS TO APPENDIX

                             Name of Exhibit                                                                                 Page Reference

                 November 1993 De L
                 {93-L-1 61) . ...... . . ... .. . ........ .. .......... .. .. ... ... . .. . ... .......... . .. . .. . ... . 1-2

                 Response to Alabama
                 Education Loan Corporation ...                                                      . .. .. ... .. .. .. ... .. . ... .. 2

                 December 1993 DCL
                 (93-L-163 LD) ..                                                                       . .................. ... .3

                 June 1995 DCL
                 (95-L-181 LD) ......                                                                 . .......... ......... ... .. 3

                 March 1996 DCL
                 (96-L-186) .. .. . .                                      . .. . ...... ... .. . ............ . .. .... ........... .4-5

                 August 3, 1999
                 Proposed Rule ...                                                                                                   .. .. .5

                 October 29, 1999
                 Final Rule ............ ..                                                         . ... ... .. ... .. .. . .. . .. . .. ...6

                 September 2004
                 GAO Report .....                                                                                                 .. ......6-7

                  HR 5 186 . .. .. .. . .. .. ... ... .. .. .. .. .. ..... . ... ......... .... ... .. ... . .. ... .. . .. . .. ... .... . 7- 10


OIG Note:
Only the fi rst three of the e~hibit s liSTed above are included in this Appendix D, Due to their length. we ha"e nOT include<lThe remaining six
exhibits. which are readily available on the internet:

    - Four exhibits are available on the Depart ment's Information for Financial Aid Professionals (l FAP) Library. at
      hnp:/li fap.ed,govn FAPWebAppfindex.jsp.

           + June 1995 OCL (95-L-1Sl LD) and March 1996 OCL (96-[",186) are avai lable under Archived Publications. Dear
             Partner/Colleague Lellers. Lender Lellers (hL" Type).

           + August 3. 1999. Proposed Rule. and October 29. 1999. Final Rul e. are available under Archived Pub lications. Federnl
             Registers. 1999 Publication Year.

    - The Taxpayer-Teacher Protection Act of 2004 (Pub. L. 108-409). the signed law resulTing from HR 5186. is available at
      hnp :flthomas.loc .govlbssld 108/d I 08laws ,htm!.

     • The GAO Report. "Federal Family Education Loan Progrnm: Statutory and Regulatory Changes Could Avert Billions in Unnecessary
       Federnl Subsidy Payments" (September 2004. GAO-04-10 70) is available at hnp :flwww ,gao.gov .




                                                                              Page 0- 19
                                                                                                               Appendix D




                    UNITED STATES DEPARTMENT OF EDUCA:                                      I'~' f1:.,frT;~, .'.
                                OFPlCZ 0 .. I'081'UCONDARY ZDtlCAnoN                                     !!IU ,~
                                           HOVEKIIER 1993                               ,   D~C      08 1993 --r;/
                                                                                        - - ~~iJ); t:.: .: '
                                                                                                 -    -
                                                                                           ... ..... .....~~;.:
                                                                                                93-L-16l
                                                                                                93-G-246
                                                                                                93-S-71


SUMMARY:             This letter contains information about the major changes made to the
                     FederaJ. Family Education Loan Program by the Omnibus Budget
                     Reoonciliation Act (Pub. L. 103-66).

Dear Colleague:

The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66) was signed into law by
President Clinton on August 10, 1993. Numerous changes affecting the Federal Family
Ed~tion Loan (FFEL) Program under Title IV, Part B of the Higher Education Act of
1965, as amended (REA), were made by this legislation. The new law also established
requirements roc the tmlsition or the FFEL Program to the Federal Direct SluOenl Loan
(FDSL) Program.

The purpose or this letter is to provide the student loan community with information on the
major program changes mandated by the new law. While some changes are self­
implementing and supersede current regulations, 04her changes wiU require that new
regulations be published. As further detailed instructions on the variow provisions are
developed. the Office of Postsecondary Education will provide additional guidance.

We appreciate your assisWlCe and cooperation as we work to implement these statutory
changes.

                                                  Sincerely,


                                                  William L. Moran
                                                  Acting Deputy Assistant Secretary
                                                  for Student Financial Assistance




                              100 IlAMYt.o.IID A\'t .• ,.W. WMIIINDTOII. D.(:. 3"''''
        ""._10 .. _       ................... _     ......... _ _ _ _ .-.-_ _
                                                  Page D-20
                                                                  Appendix 0




    TABLE OF CONTENTS


GUARANTY AGENCY PROVISIONS

    Administrative cost allowance                             I
    Advance fund payments                                     I
    Auignment of guaranty agency loans                        I
    Income-contingent repayment after default                 1
    Insurance claims paid to lenders                          2
    Insurance premium                                         2
    Lender-of-last-resort requirements                        2
    Lender referral services                                  3
    Preservation and recovery of reserves                     4
    Reinsurance fees paid by guaranty agc:ncieJ to ED         5
    Reinsurance paid by ED to guaranty agencies               5
    Reserve requirement! and transition to the FDSL Program   5
    Secretary's equitable share                               6
    Supplemental preclaims p!l.ymenls                         6

FEDERAL CONSOLIDATION LOANS

    Eligible borrower                                         7
    Income-sensitive repayment                                7
    Lender feea paid to ED                                    7
    Repayment provisions                                      8
    Terms and conditions                                      8

FEDERAL PLUS LOANS

    Multiple disbursement requirement                         9
    Variable interest rate beginning July I, 1994             9
    Variable interest rate beginning July I, 1998             9




                                   Page 0-21
                                                                Appendix 0




    TABLE OF CONTENTS


FEDERAL SfAFFORD WANS

    Unsubsidlzed Federal Stafford Loan limits              10
    Unsubsidi.zcd Federal Stafford Loan repayment period   10
    Unsubsidizcd Federal Stafford Loan origination fee     11
    Variable interest rate beginning July I, 1994          11
    Variable intetcJt rate beginning July I, 1995          11
    Variable interest rate beginning July I, 1998          11
O1lIER CBANGFS

    Cohort default ralc                                    12
    Elimination of Federal SLS Program                     12
    Loan feel &om Iendcn                                   12
    Loan fees &om Sallae Mae                               12
    Origination fees                                       13
    Special allowance payments                             13
    State share of default costs                           13




                                      ii




                                   Page 0-22
                                                                                                         Appendix 0




                                      GUARANTY AGENCIFS

The following chUlles (In alphabetical order) are the major proYlslons of Pub. L. 103-66lhat
hive dlrea Implications for guaranty aaeneies:


Administrative cost allowam!e                                                         §428(Q
       The Natutory auchority for paying an administrative COst I llowance to I iuaran!)' aaency
       pursuant to f428(f) of the HEA does not edst qfrtr filcal ,fM 1993, and guaranty
       aaencies should not submit further applications for such paymenta. HoweYer, 1458(1) of
       the HEA authorizes the Seaetary to use administrative funds IUthorized by thlt section for
       yarloua activities, Includil\l proYldinr: •. .. trII\sitlon support (Including IdminlSUlltlYe
       costa) for the apenseJ of guaranty agencies in servlcini OUbWIdi", loans in their
       ponfolios and in JIIIt&IllCCint: new loans •.•. • Additional information about this chanae
       WIll proyided in 'Dear Guarwy AJ;ency Dircctot' Leuu 93-0-245 (October 1993).

Advance rund payments                                                                 1422«)(7)
       The HEA now clarmes the Secrewy', au!hocity to make emucency 1Idvances to :I
       luarancy lJency. Effective AIlpst' 10, 1993,    !he Sccrcwy may 1Idyancc funds under this
       provision, on &enns and QOnCIitions specified by the Seaetary, to I iUll'Vlty agency to
       ensure that the 1Jenc:y is able -

               To ooOOnue to fulfill illS lendet-of-IUl·resott oblilatlons during Ihe UWlSition from
               the FFEL Program to the FDSL Program; Of

       2.      To mcec iu immediate cub needs, ineludinl the uninte~ payment of claims,
               ,.mile the Secntaty is seekin& to IemlinMe the aaeney', aarcemcnt ot ISaUminl the
               *leney's functions .

Assignment or guaranty agency loans                                                   1428«)(8)
       The HEA has been amended to ,iYe me Secretary authority effe<:!iYe AI/II/It 10, 1993, to
       direct a iUaranty aaency to promptly assign loans to the Secretary If !he Secretary
       detennines:
               An    usignmem Is requited to protecllhe federal fiscal Interest; or
       2.      It is   neceJsat)'   for an orderly ttansition from the fFEL Pro&ram to the fDSL
               Proa~·

Income-<ontingent repa),ment after ddault                               1428(b)(I)(D), 1428(m)
       EffectiYe for loans rltSt disbursed 011 or qfter }uI, 1, 1994, :I luaranl)' IIcney must ensure
       that, prior to the diJbursemcnl of I loan, the borrower'. prom issory note or 0Chu written
       cyidence or the loan contains :I notice infonni", the OOIl'O'Nel" that If the borrower defaults
       and the loan is ISSi&ncd 10 the Secretary,!he borrower may be required to repay the loan


PAGE 1 - GUARANTY AGENCY PROVISIONS



                                               Page 0-23
                                                                                                      Appendix 0




     In accordance wilh an ~ent repayment ldIedule. 1be common
     applic:atkJnlpromlssory nocc approved by the Department for Ute In the FedenI Stafford
     and FcdcnI SLS Programs already contalns a JWement dial would QDfflply with Ihb
     statutory requirement.
     Before the en.acancm of Pub. L. 103-66, borrowers who defaulted on their loans could be
     subject toincome-c:ontin&ent repayment only aftec the Scmwy published a finding that
     this melhod of repaymelll would be effecdYe. 1be flndu., requirement has been
     eliminated by Pub. L. 103-66. Effective lui] I, 1994, in accordance wllh f428(m) of the
     HBA, the Seeretaty must require at least 10 percent of borl"()\YflrJ who haYe defaulted on
     FFEL Prolram loans that are assigned to the Secrewy to repay those loans under an
     income-coruu.,ent repaymem plan. The temu and conditions of Income-contill&Cnt
     repayment shall be establi&hed by the Secretary, and will be the SUl1C as, or similar to, the
     Income-contingent repa)'merd plan used in the FDSL Program.
Insurance claims paid to lenders                                           1428(b)(I)(G)
      EffcctiYe for loans flfSI disbursed OJ! (Jr qftlr tkUlb" I, 1993, a guaranty "eney's default
      insUfaIICC n1SC insure not leu than 98 percent (down from 100 pen:ent) of the unpaki
      principal balance of loans insuced undec iu pcopwn. e..eeplions to Ihls requltement are
      provided for wilsidized Federal SlaffOfd loans made pursuant to a kn:Ier~f· lut·reson
      program and. clainu paid to a lender or servlcer (as I,JCI1l (or a lender) designated as
      exc:eplional under 14281 of the HEA. These loans must be Insured • no leu than 100
      percent of the unpaid principal balance. An "ency may conllooe to pay 100 percent of
      the amount of all IIOIl4efault claims.

      The Secretary has dccennined thlt Conuess irtendcd 10 bar guarani)' qcnc:ics from paying
      Iendcn more than 98 peroenc of the unpaid. prlnc:ipal and acaucd 1ntcrW: on defauk claims
      flkd on loans made on or after Oc:tobec I, 199). The Secretary believu, theft,fore, dial a
      guaranty "ency may not ute its ~ fund to guanlllCe more than 98 percent of the
      unpaid principal and interest on a defliUlted Joan. Set f-422(g) of the HEA.
Insurance premium                                                          1428(b)(1)(H)
     1be maximum Insurance premium that a luuanI)' qency may charge a lender has been
     reduced from 3 percent to 1 percent of the princIpal amount of the loan. This change will
     become effective lor loans flfst disbursed "" "r 4ftff JuI] I , 1994 for periods of
      ellfOllment !hal either Include that due or begin after that date.

LenderoOr-tast-resort requirements                                                 i428ij)
      1.      Effective A.ugust 10, 1993, the HEA requires a guaanty agency to respond to a
              student within 60 days after the SOJdent submits an original c:ompleie application to
              the *,ency for a loan throug.h the qency'. Iendcr-of·lut·reJOrt ( LLR) program. In
              ldcIition, I guarani)' agency cannot lubject a acudent applYlna for an LLR Joan to
              ldcIitionai eligibility requitementa or tequesta fOt additional infonnation beyond
              wI\M. is required to obuIn a IUbsklbed Fedcra1 Stafford Loan, nor can the student
              be requited to receive more than two rejections from ellglbie ienders prio£ to
              rcquestinJ assistance from the lLR propwn. HowcYer, a guaranty "ency may


PAGE 2 - GUARANTY AGENCY PROVISIONS



                                           Page 0-24
                                                                                                   Appendix 0




            pcovlde loan oouruelin, specirleally desl,ned to benefit I atude1K applylnJ for an
            u.R. loan. In doina so, the .,ency may not require I srudenllpplyin, (Of III u.R.
            loan 10 provide Infonnalion thIII. Is not required (rom othet ltuf'. uu 10 be
            considered eligible fot I loan.

      2.    Undec prior law, I guaranI)' qeJICY was not required 10 provide LLR services to
            ItUdenls attending certain eategories of sehools. Set former i428(j)(3) of the HEA.
            Effective AvfU" 10, 1993, Pub. L. 103-66 deleced that uceptlon so that I student
            attending Illy eligible sehool may apply for u.lstanc:e lhrou&h the LLR pro,ram.

      3.    Effective AVlvr, 10, 1993, If the Secretary detennlnes that eligible students are
            unable to obtain loans throu&h I guaranry .,ency', LLR program. the Seeretary is
            authorized 10 .cIvance fund. to that .,ency or anocher ,uaranty aaency puraul/lt 10
            l422(c)(7) of the HEA, so that I JUIfVIIY .,ency CIll make such loans IS directed
            by the Soaewy. A Suacant)' aaency     makin,   UR loans with funds .cIvanc:ed by
            the Secrewy shall ,be paid a fee, in IllI1MUnl established by the Secrewy. in lieu
            of ~ and special allowance IUbsIdJes. The ,UII'III\y aaency will be required
            to assJgn these Joans to the Secrewy on demand. Upon well aui&Mlem. the
            ponion of the .cIvance represented by the loans ISsi,JWeG shall be consldeted repald
            by the aaency.

      4.    Section 439(q) of the MEA has been amended to requite Sallie Mae 10 make UR.
            loans upon the request of the Secrewy. If the SeaeWy decelmInes thM ell,ible
            borrowera in • geolflphk area, or who are.nendlna: specific schools, are seeking
            and unable to obtain loans. Bt,u..u.tlf4l Iokr tIuuI 90   tID,.qfkr tht tfUKbtunt
            o.t rd. 1.. 103-66 (NOUIIlbtr I, 1193), Sallie Mae, or tts deliallltCd lien!., must
            make U.R loans, if requested.
Lender referral services                                                          §428(e)
      1.    Effec;tive AufUJl' 10, 1993, the SeaeIary may ~ into     "fCC.IneIU  with ,\IICIIlIy
            "encies dlat meet standards established by the Secretary to provide lender referral
            servicu in geolraphic ICCIlI specirled by the Seeretary. A Wdent will be eligible
            to apply for knder referral servkeslhroulh I ,uaranty .,ency that hIS III
            aarcement with the Secretary 10 provide such services if the student _
            •.     Is either a resident of, or is accepced for enrollment in, or is ancndln" an
                   eli,ible instinnlon \ocatcd in • geo,raphic area for which !he Secretary
                   determines that loans are not avai lable 10 all ellJlble students.

            b.     Has   sought, and was unable 10 nnd a lender willin, 10 mab an FFEL
                    Pro&ram lam.
      2.    The Secrewy is required to publish in !he Ftderal Refuter whatever standards,
            criteria, and procedures the Secrewy dctennines are reasonable and neceuary to
            provide lender refernl services and C/lJUf'C loan access to ItUdenI: and parent
            borrowers durin&!he traJUition from the FFEL ProJram to the FDSL Proaram.
            The MEA exemptS !he publication or dIese standards, criteria, and procedures rrom
            1431 of the Genen.I Education Proyisions Ad:.


PAGE 3 - GUARANTY AGENCY PROVISIONS



                                       Page 0-25
                                                                                                     Appendix 0




     3.    The Secretary shall pay a 1ender referral fee 10 each cuaranty agency with whom
           !he Secretary has I lender referral agreement, in III IITIOUnt equal 10 O.S percent of
           the principal amoul4 of I Joan made as a result of the agency', refUTal service.
Preservation and recovery     or reserves                                         1422(&)
           The HEA c1ariflCS!hal   ,uaranly agency ~ funds and any assets purdlue4
           with ,uc:h raerve funds, relardleu of who holds or COfIIroIs !he reserves or ass.ets,
           are consldere<!10 be the property of the United States, 10 be used in the operllion
           of die FFEL Program or the FDSL Program.

     2.    The Secrtlaty is specifically pennlllcd 10 dirca ICUUanty qency to suspend or
           cease adlvities under Illy contract enlUed Into or on behalf of I cuaranty qeney
           t¢kr J(UUMUJ1, 1993, If the Seerewy decermlneS!h1l tho ClOIUIC:I is I misuse DC
           improper upendirure of !he reserve fund (Of assets) or such c:ornaa; provldeJ
           unncoeuar)' or ~ belief'" 10 !he 1CCfICY', ortk:crs or dicectors. Violalion of
           any direaioft issued by the Secretary under !his provision may result in criminal
           penalties under 1490 of the MEA.

     3.    Any <:OnU"lIQ wi!h respect 10 !he administralion of !he "eney's reserve fund, or !he
           admlnlstration of Illy asscu purdlased DC acquire<! willi the qency'J rc.secve fund,
           tI\II. is ~ into or exlCnded by the qency or Illy 0Ihct pany on behalf of or
           wid! the c::oncurrence of !he qency, 011 01' q/Ur Au,,", 10, 1993, shall provide
           that the c:ontract lNy be ICnninated by the 5ecretary upon 30 days notice 10 the
           c:ontraclin& panlcs if the Sccrcwy dctcrmincs thai. such contrICI incluo:lcs an
           impermissible transfer of the reserve funcl or 1SJClS, or Is otherwise inconslSICnt
           willi the ICmU or putpO$t.I of 1422 of the MEA.

     4.    Effecclve Au,,"' 10, 1993, the Secretary is aulhoclzcd 10 ~ire lilt tclUm of all
           of lCUaranty qtney'. raerve Cund if the Secretary dctennlnes!hat such rerum it
           In the best intcrcsU of the opendon oflbc FFEL or FDSL Programlll or 10 ensure
           !he proper mainIenanc:e of !he qcncy'J Cunds or IUCtI or !he orderly ICmlInation
           of the qcncy's opcndons and the liquidatioll of itt UICIS. The Setrewy also has
           !he authortly 10 require I &uaranty q;cncy 10 rccum 10 the Secretary any portion of
           the .ncy', ruerve fund Ihat the Sccrcwy dclcnnlnet II unnecessary for payln&
           the procnm expcnses and continam liabilities of the "ent)'.

           In addition, the Secrcwy may direa I auarantY IJcncy to require the return, 10 the
           Sccrcwy or the glW"lllty qcncy, of any reserve funds or aS5CU held by, or under
           Ihc control of any otIIcr elllil)', If Ihc Sca"euty dctennlnes tho5e funds or asscu arc
           needed 10 pay the pro,ram expcnses and contin,ent liabilities of !he ,uaranl)'
           'leney, or whic:b are require<! for Ihe orderly ICmlInation of the &u&rVIIy qcncy'.
           oper"Ilions and the liquidation of ItllSlCtS. The deluminalions of the 5ccz"ct.ary
           disculJed In !his parqnph (unlike tho5e In parqraph 12) must be made based on
           ttandan1s pmcribcd by reauilliona 10 be developed !hroulh neaotiated rulcmaklnl
           and mar include procedures fOC" .:Iminiwlldvc due process. Further information
           about neaotlllCd rulcmaklna will be provided III a later communiCllion from the
           Dcpanmtnt.



PAGE 4 - GUARANTY AGENCY PROVISIONS



                                       Page D-26
                                                                                                     Appendix D




Reinsurance tees paid by guaranty agencies to ED                                   1428(,)(9)
     This fee (either O.2S (It O.S percent of loan prindpal &uaranteed each fiscal year) has been
     eliminated by Pub. L. 103.66, effeaiYe for loaN &uaranteed 0/1 or u,fItr
     Od4IHr I , 1"3.
Reinsurance paid by ED to guaranty agencies                                        1428(,)(1)
     On loans made prior to Occober I , 1993, the Secretary reimburseu &uaranty "ency for
     either 100, 90, or 80 percern of IIle amount of I default claim paid 10 I Jcnder. These
     reinsurance percenta&es havc been reduced 10 98, 88, and 78 percent, re.spectlvely, for
     reinsurance requests submitted for loans for MIlch the rlt$t disbursement Is made 011 or
     rifltr OcI4j.r I, 1993, with. two clleeptions:

      I.     Loans tnnsfCCTed from an inJolvent &uaranty qeney pursuant to I plan approved
             by the Sceretary will be reUuutt.d It 100, 90, and 80 peccent, fUpectlve ly.

     2.      Lendet-of-llSt·re3OI't claims will receiYe 100 percent reinsurance.
             Lendet-of-last-mort loans are subsidized federal Stafford Loans made:

             I.     By lenderl pursuant 10 IlulfWy agency's knder-of-Iast-reson program
                    approved by the Secrelll')';
             b.     8y a &uaranty llIency with funds from its re.sen>c fund or with funds
                    advanced by the Sccrewy:
                    By Sallie Mae pursuant 10 f439(q); and

             d.     1bcoup I  lend« referral prolram punuant to §423(e) thlt serves the role
                    of a Iend«-of-Jast·resort PfO&tam.
Reserve    ~uirements     and transition to the FDSL Program                        1428(,)(9)
      EffectiYe AllpstlO, 1993, 10 eNUre an ocderly transition from IIle FFEL Pro&ram to the
      FDSL Pro&ram, the Sea'eury hu been liven tho following additional POWUSIO lulu I
      &uaranty agency or lerminare the agency's rellUUtanOe agreement:

             If the Secretary determines that IIle foderal fiscil internl can be proteceed best by
             lerminaring a guaranty agency's agrcemenl, the agency, upon the requeu of the
             Secretary, mull submit I managemelll plan 10 the Secrewy within 30 worldna
             dlys, describinl the mearu by which the Sectelll')' and the a&ency Ulall work
             together to ensure the orderly termination of the llJency's operationt and the
             IlquklalJon of Its useu.
      2.     NotwithSlandlna any other provision of federal Of state law, if Ihe Secrttary has
             terminated, (It is scd:ina 10 terminate I &uaramy qency's reilUUrante agrcemelM,
             or if the Secreury has assumed the -aeney's functions , no Stale COlIn may luue
             any order Iffectin&; the Secrewy's aczkms with respea to sud! iliarant)' 'leney.



PAGE 5 - GUARANTY AGENCY PROVISIONS



                                          Page 0-27
                                                                                                    Appendix 0




             No swc law applies 10 the Sea:ewy's Idlons in tcnn1nating the qeocy's
             operalloru.

      3.     If !he Sec:reury assumes !he functions of a,uaranty .ney, the Seaewy's
             liability lOr any outsWIdin, 1~lIilies of the lIency (othet than oulsWldinJ; loan
             ,UaranICeJ) shall not exceod. the fair martel yalue or the ruerves or the "eocy,
             minw any neceuary liquidation or administrative costa.

Secretary's equitable share                                                        1428«)(6)
      1.     P,;or 10 October I , 1993, a Suaranty agency could retain the complement of Its
             reinsurance pel"CClMqC on tile loan (eilher 10 or 20 percent) plus 30 percent of the
             amount colledcd on a defaulted loan for !he IIdmlnlWlllve costa of collec:don,
             preclaima assistanee, supplemenlai prcclalms assisww:e, and monitorina !he
             enrollment and repaymeM IUlUS of borrowers. Thb amount has been roduoed to
             the compkment of the reinsurance pereel\tIJe on the loan (either 2, 12, or 22
             pereMl) plus 27 percent of any borrower payments received by the agency H or
             If/Itr ~r I, 199) on deflUltod loans.

     2.      To 1IIu.strate this diance. we proYIde the followina example: Foe a Sl ,ooo ell,ilIk
             del:auh tlaim Albjec:t to 98 percent insurance, the JUItInty qency would PlY !he
             Iendef S980. If the agency's relruunnce request to the Seaewy was subjealO 98
             percent reinsurance, !he Secrewy would nuke a reinsurance p&yment to the qency
             for S960.-40 (98 percent of $980). The debtor now owes SI,OOO to the ~.
             If !he debIor nukes a Sl,ooo paymenl. the saUICY _Id retain $20 of the deb!or's
             paymenr as the 2 percerw. complemm of the relnsutanoe percencqe (98 petCCI1I)
             applicable to the loan, pbu 27 peroenr. (S270) of the debtor's payment foc a total of
             S290. The rernaJnin& S710 would be paid to the Seaetary.
Supplemental predalms payments                                                     §42Sm(2)
      Formerly, a Juaranty "ency was paid $SO for each succeuful perfocmanee or
      supplemtlUl preclaims ISSislanc:e that avencd a defaulc. The de\ermlnatlon of a lucceuful
      perfonnance (a default claim Is not filed by !he lender within ISO days after !he loan
      became 120 days delinquenl) has not dlllIled. However, the .ncy's compensation for
      these effortl has been dIan,ed 10 equal one percent of lIIe IOta! unpaid pcinc:ipal and
      accrued Were." on the loan as of !he date the IeOOer transmlaod its requeSt for
      supplemental pte<:1ainu assilWlCC to the guaranty lIe1'\Cy. Thl, diange will apply to loans
      for which successful supplemental preclaims assistance I, initiated Oil or Iift,r
      OckJbtr 1, 1993.




PAGE 6 - GUARANTY AGENCY PROVISIONS



                                        Page 0-28
                                                                                                       Appendix 0




                        FEDERAL CONSOLIDATION WANS

The (ollow!", dwltes (in alphabetical OI'der) are the rn¥Ir provisions of Pub. L. 103-66 thll
primarily affect the Federal Consolidation Loan Pro,ram:


Eligible borrower                                                                   1428C(a)
       Pub. L. 103-66 deleted the requirement thal the borrower mU51 consolidate II least S7 ,500
       in eliaible llUdent bans. The ~irement that at least $5,000 In FFEL Pro,ram loans
       must be dischar,ed to qualify for. 15-year repayment period on the f«IeraI Consolidation
       Loan hu also been dektcd. In addition, the Sccrewy Is no lonJ:et prohibited from
       tequirina 1endecs. holden, or JUII"IIIIOl"I of Federal Consolidation Loans to receive.
       ma1nta1n, or to make reports with reJpCd: to pn:cxlstlna: records relatin& to any eU,ible
       student loan dlscharJed by the Federal Consolidation Loan. These changes take errect for
       Federal Consolidation Loans disbuned OM 0,. qfU,. Jill, I , 1994.

lncome-sensltive repayment                                                          1428C(b)
       Ir. borrower certiflCJ to. lender m., .. ",. q",. Jill, I, 1994, he Ot she hu souaht, but
       hu been unable to obtain. Fedef"Il Consolidation Loan wilt! an illOC)lTleosensitlve
       repay~ tcbedule from the hoklcn of the loans ~ the borrower wishes to consolidale,
       then any other Federal Consolidation Loan lender may lI!.I.ke, Federal Consolidation Loan
       to Ibat: borrower. Reaulationa prescribin& the rulcs to be IUCd for escablithili& Inc:om&­
       sensitive tcpIyment ldIedules for all FFEL Provam loans (except Federal PLUS Loans)
       are ~ bein& developed throuah nc, otlaIcd rulcmakln&. A DOtke of proposed
       ru lematlna: for public comment Is expeacd to be published In the fall of 1993.
Lender fees paid to ED                                                              1428C(O
        1.     Each bolder of' Federal Consolidation lean thilis dlsburx4 Oil 0,.4ft',.
               (ktolHrl, 1993, shall, on. monIhly bull, ply to the Secretary, an inleteSl
               payment rebate fee equal to an annualized rate of I .OS petCCnl of the unpaid
               principal and accrued itUreSl on the loan. This fee Is In addilion to the loan fee
               diar&ed by !he Sccrcwy purluant to 1438(d) of the HEA (0 .5 percent of the
               principal amount of the loan).

       2.      The holder of the loan should calculate the IITIOUI\t of the fee due each month by
               multiplYlna: the unpald principal and acc:rucd Interest of each such loan held by the
               lender It the end of each month by 0.0815 percent. While me Department Is
               developlna: • new form and 1)'1leIn to ICCOnunodllC the PI )'ment of fOCI on I
               month l), basis, an interim pcooedure Iw been established for boldera to pay this
               foc . Upon receipt of this letter. the holder of any Federal Consolidation Loan that
               was disburxd durin& oaober or Noyernbet 1993 should remit I combined
               payment for thole months In me form of a cheet ITIIrked "Consolidal:ion Loan fee"



PAGE 7 - FEDERAL CONSOLIDATION LOANS




                                          Page 0-29
                                                                                                   Appendix D




          made payable to the U.S. 0epanmenI: of EdIlCllIon. A cover Icacr should
          accompany the chcd:, kSenllfYin& the holder, the months that the fee lWl~ to,
          and the ImOUn: of the unpaid principal and ICaued interest. Payment ITIUa be
          malled $0 !hal it is received no Ialer than December 31, 1993 at the followln,
          address: U.S. Depanrnenc of Educ:adon, Inceresr Payment Process1na, P.O. Boll;
          413&, Grcen,UIe, Texas 75403-413&.

     3.    Bc&innina with De<:ember 1993 and for each month thereafter durin, the interim
           period, holden should send l monthly cheek in the amount of the fcc 0'Ned to the
           orne addren 10 that it Is received by the end of the following month (e.,., by
           January 31 for the monlh of De<:ember). These checb should also be marked
           "Consolidation Loan fcc" and made payable to the U.S. Department of Education.
           A cover ~ should accompany the check, ldentit'yina the holder, the month that
           the fee applies to, and the amounc of the unpaid principal and aceruod intcrut.

Repayment provlslons                                                            1428C(c)
     1     ne interest rare on l   Federal Consolidation Loan disbursed"n or qfler
           lNl,I, 1994 shall be the welpled lYeflle of the interesc rates on the bans
           oonsolldMC4, rounrXd upward 10 the nearest whole perOClll. These Joans will not
           have l mlnlmum interest rate 019 pettelt.

     2.    If the amount of the Federal Consolidation Loan is leu than $7,500, the
           borrower'. repayment ldIedulc may not uceed 10 years. This chance applies 10
           PederaI Consolidation l...oaru disbursed 011 or ~r lui} I, 1994.

Terms and condItions                                                            1428C(b)
     1.    ne providon enlillina l    FcdcraI Consolidation Loan botrowet 10 an interest
           lUbsidlzed defermtnlhas been deleted , except for l borrower who receives l
           Fcden1 Consolidation Loan that dlschqes olll)l subsidized Federal SlJofJOtd LollIS.
           This ehan&e it effec:tiw. for Federal Consolidation Loans made based on
           applicMJon:s received by an eliJibie lender 0lIl or qJUr AUI'"t 10, 1993. Any
           borrower who Is currently ellJ;ible for intuesl subsidies on I. Federal Consol1datlon
           Loan will remain eliJ;ible for those benefrts.

     2.    A borrower may also obtain l Direct Federal Consolidation Loan from the
           Sccrewy on or ~r lui} 1, 1994, if the Secretary determines that the Department
           of Education has the necessary otJ&inatlon and servicinc arrllliementl In place (or
           suc:b low. In ocdet fot l botrowtr who does not have an fDSL Procram loan to
           obWn l Direct Federal Consolidation Loan from the Secrewy, the borrower must
           certlt'y that be or she hu been unable 10 obtain a Feden.1 Con.solidllion Loan or l
           FcdenI Consolidation Loan with inoom&-sensiti\'t repayment terms from an FFBL
           Ptoatam lenOu.



PAGE 8 - FEDERAL CONSOLIDATION LOANS




                                         Page D-30
                                                                                                      Appendix 0




                                FEDERAL PLUS WANS

The tOllowina chanleJ (In alphabetical Older) are !he m~or provisions   or Pub. L.   103-66 that
primarily affea the FedenJ PLUS Loan Pro,ram:


Multiple dlsbursement requirement                                                     1428B(c)
       Any Federal PLUS Loan for whieh the fln! disbursement Is scheduled 10 be made 011 or
       q/t4r lJc:UIHr 1, 1993 will be required 10 be disburfCd in multiple Installmenu under !he
       same pnteedura that control mulllple di5bunemenl of Federal Starford and Fcckral SLS
       Loans. Ural! me completion of tile fedcraI PLUS Loan common applltatlonlpromissory
       note, which will cootain a ICClion for the IdlooIIO tpccify disbursement dales, me lender
       may make FeOcra.I PLUS Loan disbur1C1J'1e4S bQed on me umc sehcdule normally
       provided by the school for the di5bunement of FedcraI Starford and FedcraI SLS Loans,
       unless the adlool provides the lender with III alternative dIsbursement lChedule.

Variable interest rate beginning July 1. 1994                                         t427A(c)
       The variable Intetest rate on a FedenI PLUS Loan for MIld! the (1rIt disbursement is
       made "" fK(f/Wr 1111,1, 1994 shall be detmnlncd on June I of each year and shall apply
       10 me 12·monrh period beginnm, July I and end;", on June 30. 'The Secrewy shall
       detennine the inc.eresI: rate by add!", 3.1 percent 10 the bond equl~lent f"ale of Sl. week
       Treasury bills IUCtioncd at the flnallUaion held priot 10 aud! June I , uoepl dial the
       klletest race shall not exceed 9 pcreelll:.

Variable interest rate beginning July I, 1998                                         1427A(h)
       The variable illlefeS( raIe on a fedecal PLUS Loan (or which the fltA disbursemenl is
       made Oil or (f/Wr luI, 1, 1998 shall be detennlncd on June 1 of each year and shall apply
       to the 12·mond! period be&innin& July 1 and endina on June 30. The Scaewy shall
       determine the inleceA raIe by addina 2. 1 pcreenllO the bond equivalent rate of the
       securItIes with a comparable maturity, u established by the Sccrmry after consultation
       with the Secretary ofthc Treasury, except Ihlt the Interest rate shall not exccCd 9 percent.




PAGE 9 - FEDERAL PLUS WANS




                                           Page 0-31
                                                                                                        Appendix 0




                            FEDERAL STAFFORD U1ANS

The followin, changes (in alphabetical Ofdcc) are the major provisions of Pub. L. 103-66 that
primarily affect the F«Ieral Stafford Loan Proaram:


Unsubsldlzed Federal Stafford Loan limits                                           1'28H(d)
               The annual and aglreaate limits for unsub. klited Federal Stafford LoaJ)s made 10 a
               dependenl under,raduate .tudenc &hall be the AlTlC U the annual and ",re,ate
               aubsidltcd FedetaI Stafford Loan limits applicable to such ltudent, leu the amount
               of any subsidized Federal Stafford Loan received by the wdent. This d!lI1&e will
               become effective fOf loans first disbursed OA Of' qftlr 1"11 I, 1994 for periods of
               enrollment that elk include that due Of bealn after that due .

       2.      F9r any ocher student, the loan limits shall be (1 ) the IMUai and aure, 1UI
               subsidized FedetaI StafTocd Loan limits IIPPlicable to ,Ud! .tudenc, less the amount
               of any subsidized Federal Stafford Loan received by the student phil (2) the aM.Ial
               and ",re,ate loan limltI In f428H(d) of Ibo HEA. For example, I first-year
               independent undefJradua&e studert who ~iflOd ror, and received a $1,000
               lUbsidlud Federal Stafford Loan, could borrow up to an addilional $5,ill
               unsubsidizcd Fedefal Stafford Loan (51 ,ill remalnlna under f428(bXI) of the
               MEA plul $4,000 under 1418H(d)(1)I . Thla diana. will bKornt . ffecti~ for Iostu
               flfSt disbuacd OIC Of' qfkr IIIl] I , 1994 fOf periods of enrollment that elthcc
               include Ittat date Of begin after that date.

Unsubsldlzed Federal Stafford Loan repayment period                                  1.28H(.)
        1.     The bol'l"OWU" repayment period Cor an unsubsidized Federal Stafford Loan be,ins
               on the dale thc first payment of principal is due from the borrower. Thlt thanae
               win beeome effective for loans first disbursed.II or qfUr lui, 1, 19H for periods
               of enrollment that ei~ include thaa date oc bealn after thaa date.

        2.     The amount of the bofT'Owet'. periodic payment and the len,th of the repaymcnl
               schedule shall be established by auumlna an Interest rate equal to thc applkable
               rate of Intetest at the time the repayment of principal is scheduled to belin. AI. the
               option of the lender, the ptomhsory note or other written evidence of the loan may
               require that the amount of the periodic payment will be adjusted annually, oc the
               len,th of the repayment period. will be Idju.sted 10 aecommodue variable imerest
               rate chances. The Secrewy will revise the common i!pplleatlon/promlnory I'I(I(e to
               ICCOmmodaie this opdon. Thil ehan,e will become effective foc klans fiM
               disbursed 011 or qfltr lul} I, 1m for periods of enrollment that either include that
               date or begin after thll. date.




PAGE 10 - FEDERAL STAFFORD LOANS



                                           Page 0-32
                                                                                                        Appendix 0




Unsubsldiud Federal Stafford Loan ori&lnation fee                                    14288(0
      Before the enactment of PUb. L. IOJ.66, the lender was I~ired 10 charee the bon"owef I
      6.S percent ·ori,lnation fcefmsuranc.c premium. ' This roe hu been renamed u simply the
      ·orleinaion fee, · and the arnounl Jw, been reduoed 10 3 percent of the principal amoura of
      a loan fin! disbursed 011 fW q/ler JuJ] 1, 1m for I period of eN"OIImen! thll. either
      includes that dale Of bej:lns Iftet that dale. In ackIltlon, the euaranly IJency may charge
      the borrower an insurance premium thai docs IlOl: exeeod I percenl of the principal amount
      of the loan, In ac:t:Cn1ance with 1428(-1(1), effective for loans nrR disbursed 0# or qfkr
      Jul, 1, 1994 for periods of eN"OllmeN th. eiChee Include that date or be,in after that dale.

Variable Interest rate beglDnlng July 1, 1994                                        §427A(O
      The variable inCetest file on I federal SUfford Loan shall be ~Ined on JUIlC 1 of each
      yur and ahall -wI)' 10 dlC Il-mondl petiod beelMlna July 1 and endllll on June 30. The
      Sec:retary Ihall detennlne dlC IntereR file by addin&: 3. 1 petcenllO dlC borwl equivaicnr rate
      of 91--day Treuury bilb maioned III the final au<:tIon held prior 10 such l une I, eJloepl
      that the ~ file shall nol exeeod 8.lS pc:rcenl. Thlt chan&e will bwJme effectil'C for
      loaN Cd dlJbuned o. fW q/Ur JuJ] 1, 1994 for periods of eN"Ollment that eilhet include
      that date or heeln Ifter dut d.re.

Variable interest rate beglDnlng July I. 1995                                        1427A(g)
      Purina elM: ~'. in-achool, &rK", and dtfunMlnt ptciod., the            vviablo intttMt nt.e
      on I Federal Stafford l..oM shall be deIumined on June 1 of each year and shall appl)' 10
      the 12-mond! period bcJlnnin&: July 1 and encIinc on June 30. The Sec:retary shall
      decennIne!he Inere.sr. nee by addillc l .S peleenllO !he bond equivalent nee of 9 1-day
      Trwury bUb aucdonod It the full1lUCdon held prior 10 such June I, eJlccpt that the
      incerest file Ihalinol Cltc-:l 8.lS pen:ent. This chanae wi ll become effeaive for loans
      t1nt disbursed 011 or qftu Juq 1, IHS for periods of enrollment that either Include that
      daie or be,ln aftef thai Wile.

Variable interest rate beginning July I, 1998                                        1427A(h)
      The varllble intetest rate on I Federal surron! Loan shall be detennlned on June t or each
      year and shall apply 10 the Il·mondl period beelMine July I and eodin, on June 30. The
      Secretary shall deIermlne the inrerur. rate by I(Idln, I percent 10 the bond equlvaJelll rile
      of the aecurities with. c.ompanble maturity, III eRlbIiJbcd by the Secretary Ifter
      consultalion with the Secrewy of tho Treuury, Cltcept that the interest rite Ihall nor

      ""If
      Clteed 8.lS percent. This chlllle will become effeaive rOf loans first disbutlOd 0" or
            }ui, l, 1998 for petiolls or enrollment that either Include thlt dlte or be,io Ifter that
      ""'.

PAGE 11 - FEDERAL STAFFORD LOANS



                                          Page 0-33
                                                                                                      A ppendix D




                                    O11JER CHANGES

no followin& chan&es (In alphabetical order) are !he ~r provisions of Pub. L. 103.66 that
have no!: been dlscuuod In the evlier ICCtIom of this kUer:


Cohort default rate                                                                 §43S(m)
       no definltlon of a school's oohon default rllO has been modiried 10 include lIIe ponlon of
       a Fcdccal Consolidation loan ~ repaid the borrower's FedenI SaffOld or Federal SLS
       Loans mado foc MteDdance ... the sdIooI. This manae will be effCCllve Jul, I, 1994.
       0Uaranty qencles must ensure lhIla school il notIrled, In accordance willi §42&(c)(2)(H),
       whenever prcclaIms usistaPce is RqI.ICSted on a Federal Consolidatiofl Loan that repakl a
       Fcdccal su.rrord or Federal S~ Loan made to a srudenI who received the loan for
       aaendance at the school.

EUmlnatlon or Federal SLS Program                                                   §428A
       '11Ie Fedctals~ Procnm has been mer,ed inIo the unsublidUed component of !he
       Fedctal Stalford Loarl Prot;nm, and wlli no Jonaer uist as a separate Pl'Olnm. No new
       FcdenJ s~ Loans may be made for • period of enrollment begilVlina DII Dr ~r Jul} I ,
       /991. All oonditlons and benenu applicable 10 uistin, Federal S1.5 Loans will cootlnuc
       (or !hoM: )oIN. Also, to   ~   ........ lI1at almnt unsub.ldized Federal Staffonl Loans have
       dilTeteN. conditions and bencnts !han unrkr the mu,ed pto,ratn, those k)aru retain those
       ditTet-ent conditions and bencrllJ.

Loan fees from lenders                                                              1438(d)
       Pub. L. 103.66 requires the Secrewy to dw'Je a fee to leoders equal to O.S percent of !he
       principal tmO\II1. of any FFEL Pto&ram loan made Dill Dr rifUr OdD"" I , 1993. no
       Seaewy will ooilec:t Ibis fee by offsettinc!he amount of the quarterly interest and special
       allowance paymem due !he lender.

Loan rees rrom Sallie Mae                                                           1439(h)(7)
       With the uoeptk)n of Federal Consolidation loans and lendec-of-lasl·resort loans It makes
       pursuant to f.439(q) , the Studelll Loan Martetina Associaion shall pay a monthly fee to
       the Secretary, cquallO an annualized rate of 0.3 percent of the principal amount of each
       loan it IICqUIres Dill Dr 11/1" AUflUt 10, /993. If the Secrewy decermJnes !hat Sallie Mae
       has tubstWlally failed to aIIl1ply with iu kndec-of· last-reJOrt obll,alions under f.439(q).
       !he fee lncreucs 10 1 percent.




PAGE 12 • OTIIER CHANGES



                                           Page    D~34
                                                                                                      Append ix 0




Origination tees                                                                     t 438«)
      The IUnounI of ori,irwion fcc dlar. a knder may dw,e a borrower (excepl a Federal
      Consolidation Loan borrower) has been reduced from      S petcem to 3 pero:nI of !he
      principal ItOOUN of die loan. This chance win become effective foc loans first disbursed
      011 or #flU' lid, I, 1994 for perkKIs of enrollment dlar. eilher include !hal dale or be,ln
      after !hal dIU:.

Special allowance payments                                                           §438(b)(2)
              The minimum special allowance rate "noor" on new loans made or purchased, In
              IWok or In part, with funds derived from W-exempI obliJllions tw been
              repealed . AcoonIin&ly, loans made or putdlued wiIh funds obcaincd by the hokScr
              from the iuuanee of obU,alions orilfNllly issued oa Of' q/tlf Octobfr I, 1993, oc
              with funds derived from default n:lmburseme~, collections, inIefest, or other
              Income related to eli,ible loans made or purc/wcd with such tax-«empt funds, no
              km,er qualify 10 receive !he minimum special al1owance. Refinancina or
              OOllllllons which were or1lwlly iuued prlo! 10 Octobec' I, 1993, does not alter
              the eU,ibility of loans made or purchased with fundi oblained from the proceeds of
              the ori,inal financing 10 receive the minimum special a1lowanoe.

      2.      The spedal allowance rate on a FedcraI Safford Loan durin,!he borrower's In­
              school, ,nee, and defermcllil periods shall be determined by lubltitutin, "l.S
              pucent" roc "3. 10 pc:roonl" in tho calculation o:IoIc.riMd in IOI(b)(lXA}. Th il
              d'Ian&e will become effective for loans fir$I disbursed 011 0' If/k, 1141 1, 1995 fO(
              periods of enrollment that eilhef include thu dale or be,in after dial due.

      3.      The special allowance rate on a Federal Safford Loan durinJ; the borrower's In­
              school, araoe, and defermcnl periods shall be compulCd ICCOrdina: 10 the fonnula
              deIcribed in f438(b)(2)(F) of the REA. This chll\&e will become effecdve for
              loans first disbuncd Ole 0' q/ttr lid, I, 1991 for periods of enrollment that eilber
              Include thll due or be,ln after dul dale.

State share or default costs                                                         §428(n)
              B,tillllilllU, ftsCQ/ ,ttlr 1995, if a school with a cohort defaull rate exceed!n, 10
              percenl for the moll recelll fiscal year for which rates are Cllculated is JocaICd
              within a particular state, tballtIIC will be required 10 pay a fcc 10 the Secrewy to
              partially offset the SecrClary', deraull cosu relaled 10 thar. school.

      1_      For fISCal year I99S, the 1U!le', share or dcfauk CO$U will be calculated by
              lnlltiplylng the new loan volume for FY 1995 ror all schools in the lUte by 11.5
              percenI , and then InIlllplylllJlhIf. resull by !he sum of !he amounu eak:u1llcd
              under parqraph ¥J for each school in !he IIalC with , cohon defaull rate that
              exceed. 20 pertent for the moS! recent fllCll year ror which rates are calculated .
              Thll rC1U11 is then divided by the amoulll of loan volume Iltribulable 10 curreN and



PAGE 13 - Ol'HER CHANGES



                                          Page D-35
                                                                                                 Appendix 0




         former SlUdenls of schools in !hal swe cnterlfll ~ymcnt       fOl   purposes of
         a1cul.PJa the most recent flJell year e:oboct default rate.

    3.   The amount by which a school uoeeds the 20 perce", default standanl shall be the
         amount of loan volume in default (or die most recent fiscal year eohon default rate
         for the school mlnUI 20 petcenl of the amount of loan volume attributable to
         current and former studenu of the school emerlna repayment for PUrpolCs of
         calculating the most recent fiscal year cohort de fault rite.

    4.   ~   an example of the above calculations, assume there are four schools located In a
         awe, ancI each has $10 million In new loan volume for fiscal year 1995, and each
         hid $10 million uwin& repaymelll for purposea of the mcm recenI fiscal year
         cobon default rMe. If only one of the schools had • default rile thll exceeded 20
         peroetW. (for this example, assume 40 percent), the awe would owe the Sectewy
         SlSO,OOO based on the following calcular.ion:

                 $40 million X 0. 115 X S2 milijon
                                           S40 million

    5.   The 12.5 pm:enI faaor used for fiscal year 1995 inereaseslO 20 percenl!n flSCll
         year 1996, and SO percent for eadI fiscal year thueaftu. Uslfll the exUTlp1c in
         pat1&rIPh '4, this would result In • ~,OOO fee owed to the Seetecary In FY
         1996, and $1 million owed for FY 1997.

    6.   A lUte may dw',e an FfEL panicipatinc KhooI b:a1ecI In the IWC • fee based on
         the IdIool'J e:oboct default rate and the amoulll of the 1tIIe', p.,-ment owed 10 the
         Seetecary. The scae', feo strudUre for c:haraina KhocHlmuJI be IppI"OVed by the
         Secretary, and must include I pcocesl by which. school could be exempt from
         wc:h feo if the sc:hoot could demonstrale, to the IIllsfaclion of the stile and the
         Sec:rewy,!hat exceprionaJ mltl&lllfll citeumsWK\eJ contributed 10 the school',
         cobon default rate.

    7.   Additional details concernin, this requirement will be provided at • later date.




PAGE 14 - 011lER CHANGFS



                                      Page 0-36
                                                                                     Appendix 0



             UNITED STATES DEPARTMENT OF EDUCATION
                     orncE or POSTSECONDART EDlICATtOM



                                                                             NOV 2 4 I9!Il


Hr. David K. Reicher, Esq.
Foley , Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202 -5367
Dear Hr. Reicher:
Thank you for your letter of OCtober 14 regarding the statutory
special allowance rates tha t would be applicable to the refunding
ot three outstanding "taM-exe~pt" bond issues.
You indicated that the Alabama Higher Education Loan corporation
(the corporation) intends to issue "tax-exempt" refunding bonds
to redee. or otherwise retire the three original obligationa,
specitied in your letter, each of which was issued prior to
OCtober 1, 1993. Based on the facts presented in your letter, we
concur that the special allowance rates will continue to be
deterwined pursuant to SS438(b) (2)(B)(i) and (ii) of the Higher
Education Act of 1965, as amended.
Please do not hesitate to contact .e should you have further
qusstions.
                      Sincerely,

                     ?{. _-<-         ••     L---
                      Pamela A. Moran
                      Acting Chief. Loans Branch
                      Division of Policy Development
                      Policy, Training. and Analysis Service




                    400 MAJlYLAlCD AVE.. • •• • • ....... INOTDII. D.C:. _
     0...._10110_..-_.... ___ . . ,.-_ _ _ ..........-.... _
                                        Page 0-37
                                                                                       Appendix 0

                                              FOLEY       &    LARDNER




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                                                   October 14. 1993



                  Mr.  Ra1ph Madden
                   Proqraa Specialist
                   FFELP Loane Branch
                   Division of Policy a nd Program Develop.ent
                   Policy, Training, and Analysis Service
                   United State. Department of Education
                   7th and 0 Street. S.W.
                   ROB-J , Room 4310
                   Mailatop 5343
                   Washinqton, D. C. 20202

                                     Re:   Payment of Special Allowance on Eligible Loana
                                           Financed by Refunding Qbliqatigna
                    a.ar Mr. Hadelen:
                               We have bean reque. ted by Alabaaa Hiqher Education Loan
                    corporation (the "Corporation") to obtain written confinaation fro.
                    the Oepartaent of Education (the "Departlaent" ) of the corporation'.
                    understanding of the special allowance rate that will apply to
                    certain eligible loans. In particular , the corporation wish. . to
                    confirm that, following the refunding traneaction deecribed below,
                    the special allowance rate for the.e eligible loans will be
                    deterained under clauses (i) and (ii) of Section 438(b)(2)(8) of
                    the Higher Education Act ot 1965, ae a. ended (the dHigher Education
                    Act·). In conSidering your response to this letter. you may a ••ua.
                    that all loans will be "eligible loans" as defined in section
                    4J8(b) (5) of the Higher Education Act.
                                 The Corporation intends to refund three outstanding bond
                      issues, the incoa. t ram which is exempt trolD taxation under the
                      Internal Revenue Code ot 1986, a. a.ended (the "Code·, which tar.
                      includes ita predecessor, the Internal Revenue code at 1954, a.
                      a.ended) (the "Original obligations") . The original ob1igation_.
                      e ach issued prior to October 1, 1993, include:




                                                           Page 0-38
                                                                     Appendix 0



united Statas Oepartment ot Education
octobar 14, 1993
Paq. 2

          1.   Approximately $12,765,000 out.~inq principal
     aaount of Student Loan Revenue Bonds, 1986 Series A and B
     originally issued on April 8, 1986 in the a9;reqata principal
     a-aunt of $63,500,000;
          2.   Approximately $19,615,000 outstandinq principal
     &aOunt of Student Loan Revenue Bonda, 1987 Series A oriqinally
     i.sued on March 5, 1987 in the &gqregate principal aaount of
     $40,000,000; and
           3.   Approximataly $34,450,000 outstandinq principal
     allQunt of Weakly Adjustable/Fixed Rate Student Loan a.,venue
     Bonds, Seri. . 1992-8, oriqinally issu.d on Jun. 25, 1992 in
     the aqqregate princ i pal a.ount ot $35,000,000.
          The Corporation intends to issue refunding bonds, th.
income tro. which will be excluded froa qross inco•• under the Code
(the "Refundinq Bonds"), in early Oecaabar 1993 and to i . .ediately
apply the proceeds to redee. or to otherwise r.tir. the oriqinal
Obligations within 90 days.     Upon the issuance of the Refundlnq
Bonds and the deposit of the proceeds thereof und.r the truat
indenture. for each of the oriqinal Obl1qations, eligible loans and
cartain cash and proceeds curr.ntly hald und.r those ind.ntures
wU.l be transferred to the trustee (the .. TrUst.... ) under the
ind.ntur. tor the Refundinq Bonds. In considerinq your response to
thi. letter, you aay as.WUl that the Trustee will be an "eliqible
lend.r" uncIar th. Higher Eclucation Act and the holder of th. loans.
           Th. Corporation beliavas that the spacial allowanca rate
applicable to eliqible loans transf.rred to the TrUste., or aad. or
purchased by the Trust.. with funda transferred to the Trust. . ,
froll the inclentures relatinq to the Oriqinal Obliqationa sbould be
the rate ba.ed on Section 438(b)(2)(B)(i) and (ii) of the Higher
Education Act. Tni. rate, which includes the minimum floor, alao
should apply to eliqible loans which are . .de or purchas.d by the
TrUstee with funds obtained by the TrUstee fro. coll.ctiona or
default reimbur8eaents on, or interest or other income pertaining
to, eliqible loans described in or made or purcha.ed with fund.
de.cribed in the precadinq sentence or from income on tha
investment of s uch funds.
              Because the eliqible loan. described herein w.re or will
 be fi nancec:l. with tunds obtained by the holder fro.. the issuance at
 tax-ex••pt obligations originally issued prior to OCtober 1, 1993,
 they would not be eligible tor the tull special allowance rata
 (without a tloor) provided tor in Section 4J8(b) (2) (B) (iv) of the
 Higher Education Act.




                               Page 0-39
· •                                                                      Appendix D



      United. statu Oepartaent ot Education
      ootobar 14, 1993
      Page 3

                 The Corpp ration intend. to .e11 the Retundin; Bonds in
      the tirat or aecond weak ot Oeceaber 1993, and therefore, we
      r eapectfully request your expeditious r uponse.      Ple••e do not
      heaitate to c all .a with any legal or factual questiona that you
      way have in reaponding to thia letter.     I would alao appreciate
      diacusaing tha _tter with you it the Department dis agrees with the
      Corporation'. conclUsion reqardinq the applicable s pacial a llowance
      rate.



                                   ~7LL
                                   David N. Reicher



      cc: Tom Roberson




       ~_'-"""""-- ''''''''''''-




                                      Page D-40
                                                                                              Appendix 0

                                                             reo   j'~,UI




il.lbject        93-G-248, Tax Bxempt-Dmnibus Act Changes-Interest          ~   Special

    r                               December 1993
                                                                       93-L - 163(LD)
                                                                       93-0-248
                                                                       Tax- bempt
3ummary:             This letter contains information and providss guidance on the
                     changes made by the Omnihus Budget Rsconciliati on Act that
                     affect tbe Lender's IntureSt and special All owance Request
                     and Report.
~ar     Colleague:
rbe omnibus Budget Reconciliation Act was signed into law by President
~1inton on August 10, 1993.   This act amended the Higher Bducation Act ot
1965. There are several changss that atfect reporting on the Lender's
Interest and Special Allowance Requeat and Report (&0 Form 799) . This
letter provides instructions for reporting the changes required by the
new leiislation . Aleo included in this letter are instructions for
report ng the Federal Consolidation Loan Interest Rebate Fee
(Consolidation Loan Pee l ettective OCtober 1, 1993. (An ED Form 799
lith updated instructions is scheduled to be distributed tor the March
1994 quarter.J
 Although several changes had effective dates of OctOber 1, 1~~l, the
 Oepartment requests that*?~iP9' new infOrmAtion until
 er- March U9~ lJ'laz:.~e.r .                 ~.. l't1.~Y_1"g.r 'tbe ~: ~i49
a. -.n.:" '1(th';"- ebOIU >be reported . .... dju.tlljllht.,. . The changes are
lfnA'Dte4 below.

PART II - ORIGINATION PEES
            There will be a tee charged to lenders equal to O.S percent ot tbe
            principal amount of any PPEL progra. loan made
            on or after OCtober 1, 1993.
            1)       Lender fees for current quarter should be reported in Part II,
                     Column Cas:
                     LN      New loans made (including those then Bold);
                     LS •    Loans made and Bold in the current quarter if the
pyrchaee
r
                             owes the lender tees andl
                     LB -    Loans bought from another lender in ths current quarter,
                             if you OWe the lender fees.
            2)       Lender tee adjustments to previous l y reported        quarte~s      should
                     be report.ed in Part. II, Column Cas:
                     LI      Net increasee in loane made or bought 8S reported for a
                             previous quarter if you owe the l ender fees andl
                     LD      Net decreases 1n the loans made or bought aa reported for
                             a previous quarter it the fees a r e to be credited to you.


                                            Page D-41
                                                                                Appendix 0




      The amount o~ origi~tion ~ee that a lender may charge a borrower
      (except a Federal Consoliaation Loan borrower) will be reduced from 5
      percent to ) percent o~ the principal amount or the loan, errective
      for loans rirst disbursed on or after July 1 , 1994 for a period of
 ~    enrollment that either includes that date or begins atter that
      date, Lenders will continue to report this information in Part I I
 or the BO Form 799.
      The 6.5 percent ~origination fee / insurance premium- for Federal
      Unsubsidi:ed Stafford loans will be renamed as simply the Morigination
      tee" and the amount due will be reduced to 3 percent or the principal
      amount or a loan first disbursed on or after July 1, 1994 tor a period
      of enrollment that either includes that date or begins atter that date.
      LenOers will continue to report this information in Part II of the ED
      1I'0rm 799.
IART III -   INTBRIST BBNBP'ITS

      Lenders can now report loane that are subject to the 1992 excess
      interest rule for the current quarter using - 8C·,
      Ent er M£C _ in Part III, COlumn C for current quart er reporting .
      Lenders can report loan adjustments that are subject to the     199~   excess
      intereat rule using - 8I~ or -80-.
      Enter - BI - in Part III, Column C for adjustments that reSult in a
      net increase in tbe interest due.
      Bnter _HO M in Part III, Column C for adjustments chat result in
      a net decrease in interest , due .
.r   IV - SPBCIAL ALLOWANCB
      The minimu~ special allowance rate -floor- on new loans made or
      purchased, in whole or in part, with 'funds derived tram tax-exempt
      obligations haa been repea1ed. Accordingly. loans mAde or purchased
      with funda obtained by the hol~er from the i.suance or obligations
      originally issusd on or after October 1, 1993, or with tunds derived
      from derault reimbursements, co11ections, interest, or other income
      related to eligib1e 10ans made or purchased with such tax-exempt funds,
      no longer qualify to receive the minimum special allowance. Refinancing
      of obligations which were origina11y issued prior to October 1, 1993,
      does not alter the eligibility of loans made or purchased with tunds
      obtaineO from th~ procee~8 of the original finanoing to receive the
      minimum special allowance.
       Inter ~ xp~ in Part IV, Column C for tax - exempt loans that are not
       subject to tbe floor.
       Federal Starford    ~ns    - Variable interest rates beginning Ju1y 1, 1994
         The variable interest rate on a Federal Starford Loan shall be
letermined on June 1 or each year and ahal1 apply to the 12-month ~riod
 ~ginning July 1 and ending on June 30.     The Secretary shall determine the
  Lterelt , rate by adding 3.1 percent to the bond equivalent rate or 91-day
.reaBury bills auctioned at the rinal auction hald prior to such June 1,
I~pt that the interest rata shall not exceed 8 . 25 psrcent.     This
~   ~e wi11 become effective for loans first disbursed on or after
~~y 1i 1994 tor periods or enrollment that either include that date
)r be~i' n atter that date.

                                         Page 0-42
                                                                                   Appendix 0

                                                           r ..... u 7.uo




           Sneer SG in Pare IV, Column C en~ ·BVAR- in Column B, for loans
           di.bur.e~ on or afeer July 1, 1994.
 ~         Eneer XG in Part IV, Column C and ·RVAR- in Column B, tor loans
           disbursed on or atter July 1, 1994 with tax-exempt fundi'.
           Federal PLUS Loans - Variable interest rate beginning July 1, 1994
           The variable interest rate on a Pederal PLUS Loan shall be determined
           on June 1 ot each year and shall apply to the 1~-month period beginning
           July 1 an~ en~ing June 30. The Secretary ahall ~etermlne the interest
           rate by a~ding 3.1 percent to the bond equivalent rate of Sl-week
           Treaeury bills auctioned at the tinal auction held prior to such
           June 1, except that the interest rate ehall not exceed 9 percent.
           This change wi l l become effective tor loans tiret disbursed on
           or atter July 1, 1994 tor periods ot enrollment that either include
           that ~ate or begin after that date.
           Snter sa in Part IV, Column C and ·EVAR· in column S for loans
           disbursed on or after JUly 1, 1994 .
           Snter XO in part IV, Column C and ·BVAR· in ColUmn B, tor loans
           d isbursed on or after July 1, 1994 with tax-exempt funds.

 UtT V - CHANOSS IN GUARANTEED LOAN PRINCIPAL FOR 'MIS QUARTER
~ere    a re no   change~   At   this time .

'1     VI - GUARANTBBD LOAN PORTFOLIO ANALYSIS POR. END OF
·UAltTBR
~ere    are no changes at this time

        CHANQBS

"ederal ConaolidatiOrt Loans - consolidation Loan Rebate Pee
           Bach holder ot a Federal Consolidation Loart that is diebursed
           on or after October 1, 1993, shall, on a monthly b •• ie, pay to
           the Secretary , an interest payment rebate equal to an ennualize~
           rate of 1.05 percent of the unpaid principal and accrued interest
           on the loan, This fee is in addition to the lender fee cherge~
           by the Secretary,
           The interim procedures deBcribe~ below will exiet while the
           Department is developing a new torm and eystem to accommodate
           the payment ot feea on a monthly baeia . Upon receipt of this
           letter, the hol~er Of a Federa l Con8olidatlon Loan that waa
           disbursed during October, November, or December 1993 should
           remit a combined paymBnt for those months .
           1       The   holder Of the loan ahou ld calculate the amount of
                   the   tee due each month by multiplying the unpaid principal
                   and   accrued intere8t ot such loan held by the lender at the
                   end   of each month by 0,0875 percent .


                                               Page 0-43
                                                                          Appendix D




       21     The lender'S oheck should be made payable to the U.S.
              Department ot Bducation and clearly marked ·Consol idation
              Loan Pee.- In ad~ition, please include a cover letter
              identifying the t ~nder , the lender number, the month that
              the tee applies to, and tbe amount ot the unpaid principal and
              accrue4 interest.
      3)      Beginning with January 199. and tor each month thereatter
              during the interim period, holders should send a monthly
              check in the amount ot the tee owed to the aCdres. below
              80 that it is received by the end ot the tollowing month
              (•. g. by February 30 to~ the month ot January).
                      U.S. Department of Education
                      Interelt Pa~nt Processing
                      P.O. 80x 4138
                      Greenville , Tex.s 75403·4138
It you bave any que.tiODs regarding this letter, please contact the
oiabUraamant 8ranch at (202) 708·'776.
                                           sincerely,
                                           William L. Moran
                                           Atting Deputy Aseistant Secretary
                                           tor Student Finaneial Assistance




                                  Page D·44