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Sequestration has been around for a number of years now.  But, many still are not clear of what sequestration is.  The Congressional Budget Office (CBO) clarifies the concept: “Sequestration refers to automatic spending cuts that occur through the withdrawal of funding for certain (but not all) government programs.”[1]  As a reminder, sequestration that directly impacts the world of student financial aid came about as a result of the Budget Control Act (BCA) of 2011, also known as the “sequester law.”  The financial aid community was first informed of the initial round of sequestration effective in March of 2013[2] thereby first impacting aid for a complete award year in the 2013-2014 award year.  The sequestration effects of the BCA will remain with us for a couple more years, barring any future legislative action to end or reverse the BCA’s impact on the FSA programs.

A provision of the BCA mandates cuts in certain programs annually.  It is important to remember that the Title IV FSA programs are impacted 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, experience adjustments.  The DL programs are affected by a change in the applicable loan origination fee percentages, while the IASG and TEACH Grants undergo a percentage reduction in the actual award amounts offered.

The most recent announcement of the sequestration effects were released by the U.S. Department of Education (ED) in an Electronic Announcement on May 30, 2019.[3]  The outcome of this announcement results in a change in the origination fee for Direct Loans whose first disbursement is made on or after October 1, 2019, and before October 1, 2020.  The impact to the IASG and TEACH Grants are adjustments to awards where the first disbursement is made on or after October 1, 2019, but before October 1, 2020.  The specific changes are detailed 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, 2019, and before October 1, 2020, are as follows:

  • The loan fee for Direct Subsidized Loans and for Direct Unsubsidized Loans is 1.059%. For example, the fee on a $5,500 loan will be $58.24.
  • The loan fee for Direct PLUS Loans (for both parent borrowers and graduate and professional student borrowers) is 4.236%. For example, the fee on a $10,000 PLUS Loan will be $423.60.

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, 2019, and before October 1, 2020, we provide a chart of examples based upon an adaptation of the one ED provided with the Electronic Announcement here:

(Source:  Adapted from the US Department of Education’s Electronic Announcements dated May 30, 2019.)

A positive observation about the fee changes this year is that, yet again, each of the loan origination fee percentages is a tad lower, even if only by a fraction of a percent, thereby saving a small amount of costs to the borrowers.

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 5.90% for FY 20.  The new percentage reductions in award maximums are applicable to any of these grant disbursements made on or after October 1, 2019, but before October 1, 2020.

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 2018-2019 and 2019-2020award years.  The IASG changes are presented here:


(Source:  Adapted from the US Department of Education’s Electronic Announcements dated May 30,2019.)

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


(Source:  Adapted from the US Department of Education’s Electronic Announcement dated May 30, 2019.)

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 firstdisbursement 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, 2019, must use the loan fee percentage applicable based upon the FY 20 sequester.  June 4, 2019, was the date when ED first allowed institutions to submit loans through COD using the FY 20 sequester fee percentages applicable for disbursements occurring on or after October 1, 2019.  Per ED, if any loans were already submitted to COD prior to June 4, 2019, with first disbursements scheduled to occur on or after October 1, 2019, such loans will be corrected by the COD system to activate the new loan origination fee percentages.

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] Sequestration, Congressional Budget Office, https://www.cbo.gov/topics/budget/sequestration; accessed on July 11, 2019.
[2] Electronic Announcement, Federal Student Aid, U.S. Department of Education, March 1, 2013.

[3] Electronic Announcement, Federal Student Aid, U.S. Department of Education, May 30, 2019.

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This material is presented for informational and educational purposes only and should not be considered to be giving legal advice.