Direct Student Loans: Legality of Regulations Authorizing Origination Fee Reduction

Published by the Government Accountability Office on 1999-09-29.

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

United States General Accounting Office                              Office of the General Counsel
Washington, DC 20548

          Subject:       Direct Student Loans: Legality of regulations authorizing origination
                         fee reduction

          File:          B-283717

          Date:          September 29, 1999
United States General Accounting Office                              Office of the General Counsel
Washington, DC 20548


          September 29, 1999

          The Honorable Bill Goodling
          House of Representatives

          Dear Mr. Goodling:

          This letter responds to your request dated September 17, 1999. You asked us to
          comment on the legality of recent regulations authorizing the reduction of the
          origination fee charged in the William D. Ford Federal Direct Student Loan (Direct
          Loan) Program. In our view, the regulations conflict with a statutory requirement
          that the Department of Education (the Department) charge a 4 percent origination
          fee for loans made under the Direct Loan Program.


          In order to make financial assistance available to higher education students,
          Congress has established two federally insured student loan programs. The Federal
          Family Education Loan (FFEL) Program provides incentives for private lenders to
          make higher education loans. The Direct Loan Program authorizes the Department
          to make such loans directly to eligible students.

          To help offset federal costs, both programs require payment of origination fees to the
          Department. Until last year, the law fixed these fees at 4 percent for Direct Loans1
          and an amount not to exceed 3 percent for FFEL loans.2 The Higher Education
          Amendments of 1998 (HEA 1998) specified conditions under which FFEL lenders
          may offer discounts on origination fees, expressly allowing them to reduce the 3

              20 U.S.C. §1087e(c) (1994 ed.).
            20 U.S.C. §1087-1(c)(2) (1994 ed.) (the law also provided for the collection of an
          insurance fee of not more than 1 percent for FFEL loans, see 20 U.S.C.
          §1078(b)(1)(H) (1994 ed.)).
percent fee to borrowers in financial need.3 This legislation did not affect the Direct
Loan origination fee, which remains fixed at 4 percent.

On August 24, 1999, the Department published final regulations authorizing
reductions in loan origination fees to borrowers under the Direct Loan Program
commensurate with those provided to FFEL borrowers.4 In its preamble to the rule,
the Department points out that the Higher Education Act of 1965, as amended,
contemplates that borrowers in the Direct Loan Program are to receive the same
terms, conditions and benefits on their loans as borrowers in the FFEL Program.
Therefore, in the Department’s view, any flexibility in the origination fee for the
FFEL program is also available for the Direct Loan Program.


The HEA provision calling for the same terms, conditions, and benefits for
borrowers in the FFEL and Direct Loan Programs expressly defers to contrary
provisions in the same body of law:

         “Unless otherwise specified in [the Direct Loan Program], loans made to
         borrowers … shall have the same terms, conditions, and benefits and be
         available in the same amounts, as loans made to borrowers under [the FFEL
         Program].” 20 U.S.C. §1087e(a)(1) (1994 ed.) (emphasis added).

Congress has provided clear and unambiguous direction to the Department to charge
Direct Loan Program borrowers an origination fee of 4 percent:

         “The Secretary shall charge the borrower of a loan made under [the Direct
         Loan Program] an origination fee of 4.0 percent of the principal amount of
         loan.” 20 U.S.C. §1087e(c) (1994 ed.).

The Supreme Court has confirmed that where the law is clear, “that is the end of the
matter, for the court, as well as the agency, must give effect to the unambiguously
expressed intent of Congress.” 5

The Department asserts that the provision, quoted above, requiring that Direct Loan
borrowers be charged a 4 percent origination fee (while some FFEL borrowers can

 Pub. L. No. 105-244, §433, 112 Stat. 1581, 1710 (1998) (classified to 20 U.S.C. §1087-
1(c)(2) (1994 ed.)).
 Department of Education Final Rule, 64 Fed. Reg. 46,252 (amending 34 C.F.R.
 Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 at 842-43

Page 2                                                                           B-283717
receive a reduced fee) conflicts with the provision generally requiring the same
terms and conditions for both the Direct Loan and FFEL loan programs. We

There is no conflict between the Direct Loan fee requirement and the provision
calling for the two programs to have the same terms and conditions, “unless
otherwise specified.” By setting a 4 percent fee for the Direct Loan program the
Congress has specified that in this respect the terms and conditions of the two
programs will not be the same.

Consistent with this conclusion, and contrary to the Department’s assertion, the
legislative history of HEA 1998 indicates that the need to address both programs
individually was understood at the time Congress authorized the FFEL fee reduction.
Before the 1998 adoption of the House provision affecting only the FFEL Program,
the Senate voted down an amendment that would have reduced student loan fees in
both the FFEL and Direct Loan Programs.6


The regulation is in conflict with the statute. Under current law, the Department
lacks authority to enact a rule authorizing origination fees of less than 4 percent for
the Direct Loan Program.


Robert P. Murphy
General Counsel

    S. Amdt. 3118, 105th Cong. (1998) (see floor debate at 144 Cong. Rec. S7857-64).

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Regulations authorizing reduction of the origination fee charged in the William D.

Ford Federal Direct Student Loan Program conflict with statutory requirement that

Department of Education charge a 4 percent origination fee for loans made under

that program.

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