TITLE:  Direct Student Loans: Legality of regulations authorizing origination fee reduction
BNUMBER:  B-283717
DATE:  September 29, 1999
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Direct Student Loans: Legality of regulations authorizing origination fee
reduction, File: B-283717, Date: September 29, 1999

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

File: B-283717

Date: September 29, 1999

B-283717

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.

Background

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 Loans [1] 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 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.

Analysis

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. sect.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. sect.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 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 disagree.

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]

Conclusion

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.

Sincerely,

Robert P. Murphy
General Counsel

B-283717

Digest:

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.

Notes

1. 20 U.S.C. sect.1087e(c) (1994 ed.).

2. 20 U.S.C. sect.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. sect.1078(b)(1)(H) (1994 ed.)).

3. Pub. L. No. 105-244, sect.433, 112 Stat. 1581, 1710 (1998) (classified to 20
U.S.C. sect.1087-1(c)(2) (1994 ed.)).

4. Department of Education Final Rule, 64 Fed. Reg. 46,252 (amending 34
C.F.R. sect.685.202).

5. Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 at
842-43 (1984).

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