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Impact of Sequestration for FY 2019

July 5, 2018
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Does it seem like ten years is a long time?  That is the period of time over which those working with Federal Student Aid (FSA) have to address the effects of “sequestration.”  For those who have been around a year or more, you will recall that sequestration came about as a result of the Budget Control Act (BCA) of 2011.  The financial aid community was first impacted with the first round of sequestration effective in March of 2013[1].  BCA is commonly called the sequester law.  A portion of the BCA mandates comprehensive cuts in certain programs annually.  The sequestration effects of the BCA are still with us for a few more years, barring any future legislative action to end or reverse the BCA’s impact on the FSA programs.

It is important to remember that the BCA impacts various Title IV FSA programs differently.  For example, the Federal Pell Grant program is exempt from sequester.  But, other programs are impacted, specifically the Federal Direct Loan (DL) programs and the Iraq-Afghanistan Service Grants (IASG), as well as the TEACH Grant program.  The DL programs are required to experience an alteration in the applicable loan origination fees, while the IASG and TEACH Grants undergo a percentage reduction in the award amounts made.

The most recent announcement of the sequestration effects were released by the U.S. Department of Education (ED) in an Electronic Announcement on June 6, 2018.[2]  The outcome of this announcement yields a change in the origination fee for Direct Loans whose first disbursement is made on or after October 1, 2018, and before October 1, 2019.  The impact to the IASG and TEACH Grants are adjustments to awards where the first disbursement is made on or after October 1, 2018, but before October 1, 2019.  The specific changes are highlighted and illustrated below.

Federal Direct Loans – Origination Fees

The loan origination fees for Federal Direct Loans where the first disbursement is made on or after October 1, 2018, and before October 1, 2019, are as follows:

  • The loan fee for Direct Subsidized Loans and for Direct Unsubsidized Loans is 062%. For example, the fee on a $5,500 loan will be $58.41.
  • The loan fee for Direct PLUS Loans (for both parent borrowers and graduate and professional student borrowers) is 248%. For example, the fee on a $10,000 PLUS Loan will be $424.80.

As has become our practice, in order to assist you in understanding the effects of sequestration on loan disbursements made on or after October 1, 2018, and before October 1, 2019, we provide a chart of examples based upon an adaptation of the one ED provided with the Electronic Announcement here:

A positive observation about the fee changes this year is that, once again, each of the loan origination fee percentages is a tad lower, even if only by a fraction of a percent.

Iraq-Afghanistan Service Grant and TEACH Grant Awards

The award maximums for the Iraq-Afghanistan Service Grants (IASG) and the TEACH Grants, as stated earlier, are also impacted by sequestration.  Under this year’s BCA results, the IASG or TEACH Grant award maximum for which a student would have otherwise been eligible if sequestration was not in effect must be reduced by 6.20%The new percentage reductions in award maximums are applicable to any of these grant disbursements made on or after October 1, 2018, but before October 1, 2019.

As with the change in Direct Loan origination fees, ED also provided sample illustrations of the impact of the change in the IASG and TEACH Grant awards in chart form.  These sequestration reduction amounts are shown below as applicable to both the 2017-2018 and 2018-2019 award years.  The IASG changes are presented here:

And, the impact on TEACH Grant awards are illustrated as follows:

 

Important Reminders

It is critical that institutions remember that the applicable percentage rate for the loan origination fee is based upon the date of the first disbursement of the loan.  Any subsequent disbursements on that loan have the same loan fee percentage rate as was applicable to the first disbursement.

Any loans being submitted now, with a first disbursement to be made on or after October 1, 2018, must use the loan fee percentage applicable based upon the FY 19 sequester.  Per ED, loans already submitted to COD prior to ED’s June 18, 2018, implementation of these new fee percentages that had a first disbursement scheduled on or after October 1, 2018, will be corrected by the COD system to activate the new loan origination fee by the COD system.  (This correction by COD was to occur “soon after June 18, 2018.”)

ED has stated that any COD questions related to implementation of the new required loan origination fees should be addressed to the COD School Relations Center at 800-848-0978 for Direct Loans, or by e-mail to CODSupport@ed.gov.

Should you have any additional questions regarding this topic, please feel free to contact FAME Customer Service through the Client Solution Center.

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[1] Electronic Announcement, Federal Student Aid, U.S. Department of Education, March 1, 2013.

[2] Electronic Announcement, Federal Student Aid, U.S. Department of Education, June 6, 2018 (with a subsequent correction on June 14, 2018).

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