STUDENT LENDING AND ACCESS TO HIGHER EDUCATION:
NEW INSTITUTIONAL RESPONSIBILITIES
June 24 – 27, 2009
Brian W. Jones, Esq.
Dow Lohnes PLLC
Washington, D.C.
Presentation Supplement
In August 2008, Congress passed the Higher Education Opportunity Act (the “HEO Act”), which
contains extensive new provisions governing relationships between schools and lenders. This
outline highlights certain key requirements that relate to student lending and either directly or
indirectly place new responsibilities on institutions of higher education.
I.

The Regulation of Private Education Loans
For the first time, the HEO Act introduced restrictions and requirements relating to private
student loans.
o The HEO Act added the majority of these new restrictions to the Truth In Lending
Act (“TILA”).
o The definition of “private education loan” is very broad, and includes any loan
provided by a lender that “(i) is not made, insured, or guaranteed under of [sic] title
IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq); and (ii) is issued
expressly for postsecondary educational expenses to a borrower, regardless of
whether the loan is provided through the educational institution that the subject
student attends or directly to the borrower from the private educational lender[.]”
TILA § 140(a)(7).

Private education loan lenders must comply with provisions relating to, among other things,
gifts, revenue sharing, co-branding, and advisory boards.
o The prohibition against “gifts” functions like an anti-inducement provision for private
education lenders.
o The definition of “gift” is extremely broad, and includes “any gratuity, favor,
discount, entertainment, hospitality, loan, or other item having more than a de
minimis monetary value, including services, transportation, lodging, or meals,
whether provided in kind, by purchase of a ticket, payment in advance, or
reimbursement after the expense has been incurred…” TILA § 140(a)(2).

In addition, the HEO Act mandated that private student loans include certain terms:
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o Acceptance and Lock-up Period: the borrower shall have the right to accept the terms
of the loan and consummate the transaction at any time within 30 calendar days (or
such longer period as the private educational lender may provide) following the date
on which the application for the private education loan is approved and the borrower
receives the [required] disclosure documents… and the rates and terms of the loan
may not be changed by the private educational lender during that period.
o Rescission right: the borrower may cancel the loan, without penalty, at any time
within 3 business days of the date on which the loan is consummated.
o No Prepayment Penalty: private educational lenders are expressly prohibited from
imposing any fee or penalty on a borrower for early repayment or pre-payment of any
private educational loan.

Institutions offering institutional loan products may qualify as private education lenders.
o Under the HEO Act, “private education lender” means: “(A) a financial institution, as
defined in section 1813 of Title 12 that solicits, makes, or extends private education
loans; (B) a Federal credit union, as defined in section 1752 of Title 12 that solicits,
makes or extends private education loans; and (C) any other person engaged in the
business of soliciting, making, or extending private education loans[.]” TILA
§ 140(a)(6) (emphasis added).
o As private lenders, institutions would be required to comply with elements of TILA
and Regulation Z, including considerable reporting and disclosure requirements and
mandatory loan terms noted above.
o This point is being discussed in Negotiated Rulemaking.

Any institution providing prospective borrowers with information relating to private loans
must disclose certain information to such borrowers.
o Most significant of the new disclosures are the private loan informational forms being
developed by the Federal Reserve Board (proposed forms published March 24, 2009,
in 74 Fed Reg. 12464).
II.
Preferred Lender Arrangements

Institutions are deemed to have entered into a “preferred lender arrangement” if they
recommend, promote or endorse a lender that provides Title IV Program loans or private
loans to the school’s students or their families.

ED is suggesting in connection with Negotiated Rulemaking that anything beyond a historic
lender list creates a preferred lender arrangement.
o A “historic lender list” is a comprehensive list of lenders that have provided loans
to the institution’s students over a set period of time (e.g., 3-5 years). According
to ED, any subset of such a list of lenders, including based on volume, results in
an implied endorsement and constitutes a preferred lender arrangement.
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
Institutions that enter into a preferred lender arrangement must create a preferred lender
list that satisfies specific criteria, including:
o Separate lists for FFEL and private education loan lenders;
o At least three unaffiliated lenders on an FFEL preferred lender list and two
unaffiliated lenders on a private education loan preferred lender list;
o Prominent disclosure of method and criteria used to select lenders on list;
o A statement regarding why the institution chose to enter into preferred lender
arrangements; and
o Comparative loan information.

Institutions that enter into a preferred lender arrangement also are subject to a host of
additional requirements including:
o Disclosures to borrowers and the public on the institution’s website and in any
other publications, mailings, electronic messages, or materials that discuss
financial aid opportunities; and
o Annual Reporting to ED.
III.

The Federal Code of Conduct
All institutions must adopt a Code of Conduct that includes specific provisions relating to:
o
o
o
o
o
o
o

Revenue-Sharing Arrangements;
Gifts (Inducements);
Certain Contracting Arrangements;
Borrower Choice;
Opportunity Pool Funds;
Certain Staff Assistance; and
Certain forms of Advisory Board Compensation.
Sorting out the prohibited activities from the permissible is a challenge. The Code of
Conduct statutes and the related regulations include certain “safe harbors,” much like the
“permissible activities” list in the current regulations concerning prohibited inducements.
o Institutions should closely scrutinize any lender services or activities that do not
clearly fall within such safe harbors.

IV.

Federal preemption?
State Codes of Conduct
Many institutions also are subject to state laws, or state codes of conduct by which they have
agreed to abide. Examples include:
o Cuomo’s Code of Conduct
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o
o
o
o

V.
SLATE
Maryland College Loan Code of Conduct
New Jersey Student Loan Code of Conduct
Arizona Student Loan Code of Conduct
In the absence of clear federal preemption, institutions must be prepared to comply with
more restrictive state provisions.
Status of Current Regulatory Efforts by ED
ED promulgated new regulations in 2007, effective July 1, 2008, with new provisions relating to
school-lender relationships. However, these regulations were promulgated before the HEO Act
was passed and signed into law. Presently, ED is conducting a Negotiated Rulemaking, the
result of which will be revised and expanded regulations that carry out the requirements of the
HEO Act.
VI.
Practical Responses
•
•
Routinely TRAIN financial aid office employees on rules of the road
General Counsel should BE AWARE of and BE ENGAGED in what goes on in the FAO
– you’d be surprised
Periodically REVIEW DOCUMENTS distributed by the FAO
PAY ATTENTION to regulatory developments
ASK QUESTIONS
•
•
•
Brian W. Jones is an attorney with the Washington, D.C. law firm of Dow Lohnes PLLC, where
he counsels educational institutions regarding compliance with a broad array of federal, state
and accrediting agency regulations.
He may be reached at (202) 776-2341 or
bjones@dowlohnes.com.
This document is intended to provide general information on certain provisions of the Higher
Education Opportunity Act, but should not be considered legal advice. For such advice, readers
should consult with qualified counsel familiar with their particular circumstances.
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Higher Education Act Reauthorization
New Requirements Relating to
Preferred Lender Arrangements
The U.S. Department of Education (the “Department”) addressed for the first time
“preferred” or “recommended” lender arrangements in the regulations that took effect July 1,
2008. The reauthorized Higher Education Act of 1965 (“HEA”) codifies in statute many of the
elements introduced in those regulations, and also sets forth a host of additional requirements.
To ensure compliance with these new requirements, schools will need to revisit their existing
preferred lender relationships and, in particular, the manner in which they promote their
preferred lenders.
Following, we review certain key elements of the new law relating to preferred lender
arrangements. We note, however, that it will be some time before the form and content of
disclosures relating to preferred lender arrangements, including preferred lender lists, is
completely settled. Congress has permitted the Department an 18-month window to determine
the exact nature of the information that must be disclosed to prospective borrowers and their
families. These and other issues are currently the subject of a negotiated rulemaking process
being undertaken by the Department. In the interim, institutions should act in good faith, consult
with counsel, and make every effort to comply with the new law.
I.
Preferred Lender Lists
Under the new law, an institution, or any institution-affiliated organization, is deemed to
have entered into a “preferred lender arrangement” if it recommends, promotes or endorses a
lender that provides Title IV Program loans or private loans to the school’s students or their
families. Any school party to preferred lender arrangements must, in turn, create a preferred
lender list (or lists, if there are private loan lenders) disclosing such arrangements. Preferred
lender lists must be updated annually, and made available to students and their families. As
discussed below, the reauthorized HEA offers extensive commentary regarding the form and
content of such preferred lender lists.
Unaffiliated Lenders
Significantly, the new law expands and revises the “unaffiliated lender rule.” The
reauthorized HEA, like the existing regulations, requires each school’s preferred lender list to
include at least three unaffiliated lenders. The new law further provides that where a school has
a preferred lender list for private loans, it must ensure that the private loan preferred lender list
includes at least two unaffiliated lenders. In addition, for each lender included on a preferred
lender list, the school must indicate whether the lender is an affiliate of another lender on the list,
and describe the details of any such affiliation.
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Interestingly, the new law shifts the burden of the “affiliate” determination from schools
to the Department, a shift no doubt welcomed by the regulated community. Formerly, each
school had to gather information from the lenders on its preferred lender list in order to
determine such lenders’ affiliations. The reauthorized HEA, however, directs the Department to
create a list of eligible lender affiliates, and instructs schools to use the most recent version of
this list to determine whether any affiliations exist among their preferred lenders. Of course,
until the Department’s list is available, schools will continue to shoulder the responsibility for
determining whether lenders on their lists are affiliated.
Method and Criteria
The new law, like the regulations, also requires each institution to prominently disclose
on the face of its preferred lender list the method and criteria it uses to select lenders for the list.
The reauthorized HEA amplifies this requirement, stating that the discussion of method and
criteria should demonstrate that lenders are selected on the basis of the best interest to the
borrowers, and examine factors such as:




payment of origination or other fees on behalf of the borrower;
highly competitive interest rates, or other terms and conditions or provisions of
loans under this title or private education loans;
high-quality servicing for such loans; or
additional benefits beyond the standard terms and conditions or provisions for
such loans.
The new law also introduces a separate requirement that each school articulate why it has
chosen to enter into a preferred lender arrangement with the lenders on its lender list,
“particularly with respect to terms and conditions or provisions favorable to the borrower.” This
discussion should focus on articulating why the lenders on the list best satisfy the “method and
criteria” the school uses to guide its selection.
Minimum Information Relating to Loan Terms
A significant element of the new law relating to preferred lender lists has not yet been
finalized. Congress has directed the Department to determine what “minimum information”
regarding Title IV loan terms and benefits schools should provide to prospective borrowers and
their families in connection with preferred lender lists (“Minimum Information”). Congress has
afforded the Department 18 months to decide the scope and content of the Minimum
Information, and also to develop a model disclosure form institutions may use to disclose the
Minimum Information.
The reauthorized HEA suggests that the Minimum Information should include, among
other things, the interest rate and terms and conditions of the lender’s loans for the next award
year, including loan forgiveness and deferment, information on any charges, such as origination
and Federal default fees, and the amount the borrower may pay in interest, based on a standard
repayment plan. We anticipate that the Department’s ultimate determination will largely
incorporate these suggestions. At this time, however, schools should continue to provide with
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their preferred lender lists the “comparative information regarding interest rates and other
benefits” required under the existing regulations.
Finally, schools will be pleased to note that under the new law, lenders are responsible
for providing schools with the Minimum Information the Department ultimately determines
should be disclosed.
II.
Additional Disclosures
The reauthorized HEA directs schools to provide prospective borrowers and their
families with a number of disclosures relating to preferred lender arrangements in addition to the
information that must be included on the face of each school’s preferred lender list. Many of
these additional disclosure requirements are placed upon institution-affiliated organizations, as
well as the institutions, and include private loans within their scope.
For example, an institution, or any organization affiliated with that institution, with a
preferred lender arrangement must disclose on its website and in any other publications,
mailings, electronic messages, or materials that discuss financial aid opportunities:



the maximum amount of Federal grant and loan aid under title IV available to students;
for each type of loan offered pursuant to a preferred lender arrangement, the Minimum
Information relating to that loan; and
a statement that the institution is required to process the documents required to obtain a
Title IV loan from any eligible lender the student selects.
If the institution, or affiliated entity, is party to a preferred lender arrangement involving
private loans, it must also disclose in its financial aid publications, mailings, electronic messages,
certain information specified in Section 128(e) of the Truth in Lending Act.
Annual Report to the Secretary
Significantly, the reauthorized HEA introduces a new annual reporting obligation for
schools, and school-affiliated organizations. This report must be provided to the Department,
made available to public, and provided to prospective and current students and their families.
The information required to be included in the annual report is entirely duplicative of
information that the new law requires schools to provide in connection with their preferred
lender lists (see Section I, above), or as part of their general disclosure obligations.
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III.
The Relationship Between the New Law, the Existing Regulations, and State
Requirements Relating to Preferred Lender Arrangements
As noted above, the Department has previously promulgated regulations governing
preferred lender arrangements and lists, as well as related guidance. Schools should keep in
mind that the requirements of the reauthorized HEA prevail over such regulations or guidance
insofar as they conflict or are inconsistent with the new law. However, it is also true that the
Department’s regulations and guidance will continue to be in effect unless they conflict or are
inconsistent with the new law. Consequently, institutions should seek to comply first with the
provisions of the reauthorized HEA, and then with the elements of the regulations and guidance
that are consistent with the new law.
A similar tact must be taken with state laws concerning preferred lender arrangements
and lists. A basic principle of the American system of government is that Federal law supersedes
state law. However, Congress has not declared any intention to completely pre-empt state
regulation of higher education in general or preferred lender relationships in particular. As such,
to the extent a state’s laws that regulate the activities of higher education institutions, including
such things as preferred lender relationships, do not conflict with provisions of the new law, they
will remain in effect. Conversely, if a state’s laws do conflict or are clearly inconsistent with any
of the reauthorized HEA provisions or the existing regulations, the Federal law will prevail.
IV.
Contact Information
Please contact Brian W. Jones, (202) 776-2341, bjones@dowlohnes.com or Aaron Lacey,
(202) 776-2613, alacey@dowlohnes.com, if you have any questions regarding the matters
discussed herein.
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