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Federal Coordination and Compliance Section

20 USC 1087-1

TITLE 20--EDUCATION

CHAPTER 28--HIGHER EDUCATION RESOURCES AND STUDENT ASSISTANCE

SUBCHAPTER IV--STUDENT ASSISTANCE

Part B--Federal Family Education Loan Program

Jump to the relevant civil rights provision

Sec. 1087-1. Special allowances


(a) Findings

In order to assure (1) that the limitation on interest payments or
other conditions (or both) on loans made or insured under this part, do
not impede or threaten to impede the carrying out of the purposes of
this part or do not cause the return to holders of loans to be less than
equitable, (2) that incentive payments on such loans are paid promptly
to eligible lenders, and (3) that appropriate consideration of relative
administrative costs and money market conditions is made in setting the
quarterly rate of such payments, the Congress finds it necessary to
establish an improved method for the determination of the quarterly rate
of the special allowances on such loans, and to provide for a thorough,
expeditious, and objective examination of alternative methods for the
determination of the quarterly rate of such allowances.

(b) Computation and payment

(1) Quarterly payment based on unpaid balance

A special allowance shall be paid for each of the 3-month
periods ending March 31, June 30, September 30, and December 31 of
every year and the amount of such allowance paid to any holder with
respect to any 3-month period shall be a percentage of the average
unpaid balance of principal (not including unearned interest added
to principal) of all eligible loans held by such holder during such
period.

(2) Rate of special allowance

(A) Subject to subparagraphs (B), (C), (D), (E), and (F) and
paragraph (4), the special allowance paid pursuant to this
subsection on loans shall be computed (i) by determining the average
of the bond equivalent rates of 91-day Treasury bills auctioned for
such 3-month period, (ii) by subtracting the applicable interest
rate on such loans from such average, (iii) by adding 3.10 percent
to the resultant percent, and (iv) by dividing the resultant percent
by 4. If such computation produces a number less than zero, such
loans shall be subject to section 1077a(f) of this title.
(B)(i) The quarterly rate of the special allowance for holders
of loans which were made or purchased with funds obtained by the
holder from the issuance of obligations, the income from which is
exempt from taxation under title 26 shall be one-half the quarterly
rate of the special allowance established under subparagraph (A),
except that, in determining the rate for the purpose of this
division, subparagraph (A)(iii) shall be applied by substituting
``3.5 percent'' for ``3.10 percent''. Such rate shall also apply to
holders of loans which were made or purchased with funds obtained by
the holder from collections or default reimbursements on, or
interests or other income pertaining to, eligible loans made or
purchased with funds described in the preceding sentence of this
subparagraph or from income on the investment of such funds. This
subparagraph shall not apply to loans which were made or insured
prior to October 1, 1980.
(ii) The quarterly rate of the special allowance set under
division (i) of this subparagraph shall not be less than 9.5 percent
minus the applicable interest rate on such loans, divided by 4.
(iii) No special allowance may be paid under this subparagraph
unless the issuer of such obligations complies with subsection (d)
of this section.
(iv) Notwithstanding clauses (i) and (ii), the quarterly rate of
the special allowance for holders of loans which are financed with
funds obtained by the holder from the issuance of obligations
originally issued on or after October 1, 1993, the income from which
is excluded from gross income under title 26, shall be the quarterly
rate of the special allowance established under subparagraph (A),
(E), or (F), as the case may be. Such rate shall also apply to
holders of loans which were made or purchased with funds obtained by
the holder from collections or default reimbursements on, or
interest or other income pertaining to, eligible loans made or
purchased with funds described in the preceding sentence of this
subparagraph or from income on the investment of such funds.
(C)(i) In the case of loans made before October 1, 1992,
pursuant to section 1078-1 \1\ or 1078-2 of this title for which the
interest rate is determined under section 1077a(c)(4) of this title,
a special allowance shall not be paid unless the rate determined for
any 12-month period under subparagraph (B) of such section exceeds
12 percent.
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\1\ See References in Text note below.
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(ii) In the case of loans disbursed on or after October 1, 1992,
pursuant to section 1078-1 \1\ or 1078-2 of this title for which the
interest rate is determined under section 1077a(c)(4) of this title,
a special allowance shall not be paid unless the rate determined for
any 12-month period under section 1077a(c)(4)(B) of this title
exceeds--
(I) 11 percent in the case of a loan under section 1078-1
\1\ of this title; or
(II) 10 percent in the case of a loan under section 1078-2
of this title.

(D)(i) In the case of loans made or purchased directly from
funds loaned or advanced pursuant to a qualified State obligation,
subparagraph (A)(iii) shall be applied by substituting ``3.5
percent'' for ``3.10 percent''.
(ii) For the purpose of division (i) of this subparagraph, the
term ``qualified State obligation'' means--
(I) an obligation of the Maine Educational Loan Marketing
Corporation to the Student Loan Marketing Association pursuant
to an agreement entered into on January 31, 1984; or
(II) an obligation of the South Carolina Student Loan
Corporation to the South Carolina National Bank pursuant to an
agreement entered into on July 30, 1986.

(E) In the case of any loan for which the applicable rate of
interest is described in section 1077a(g)(2) of this title,
subparagraph (A)(iii) shall be applied by substituting ``2.5
percent'' for ``3.10 percent''.
(F) Subject to paragraph (4), the special allowance paid
pursuant to this subsection on loans for which the applicable rate
of interest is determined under section 1077a(h) of this title shall
be computed (i) by determining the applicable bond equivalent rate
of the security with a comparable maturity, as established by the
Secretary, (ii) by subtracting the applicable interest rates on such
loans from such applicable bond equivalent rate, (iii) by adding 1.0
percent to the resultant percent, and (iv) by dividing the resultant
percent by 4. If such computation produces a number less than zero,
such loans shall be subject to section 1077a(f) of this title.

(3) Contractual right of holders to special allowance

The holder of an eligible loan shall be deemed to have a
contractual right against the United States, during the life of such
loan, to receive the special allowance according to the provisions
of this section. The special allowance determined for any such 3-
month period shall be paid promptly after the close of such period,
and without administrative delay after receipt of an accurate and
complete request for payment, pursuant to procedures established by
regulations promulgated under this section.

(4) Penalty for late payment

(A) If payments of the special allowances payable under this
section or of interest payments under section 1078(a) of this title
with respect to a loan have not been made within 30 days after the
Secretary has received an accurate, timely, and complete request for
payment thereof, the special allowance payable to such holder shall
be increased by an amount equal to the daily interest accruing on
the special allowance and interest benefits payments due the holder.
(B) Such daily interest shall be computed at the daily
equivalent rate of the sum of the special allowance rate computed
pursuant to paragraph (2) and the interest rate applicable to the
loan and shall be paid for the later of (i) the 31st day after the
receipt of such request for payment from the holder, or (ii) the
31st day after the final day of the period or periods covered by
such request, and shall be paid for each succeeding day until, and
including, the date on which the Secretary authorizes payment.
(C) For purposes of reporting to the Congress the amounts of
special allowances paid under this section, amounts of special
allowances paid pursuant to this paragraph shall be segregated and
reported separately.

(5) ``Eligible loan'' defined

As used in this section, the term ``eligible loan'' means a
loan--
(A)(i) on which a portion of the interest is paid on behalf
of the student and for the student's account to the holder of
the loan under section 1078(a) of this title;
(ii) which is made under section 1078-1,\2\ 1078-2, 1078-3,
1078-8, or 1087-2(o) of this title; or
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\2\ See References in Text note below.
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(iii) which was made prior to October 1, 1981; and
(B) which is insured under this part, or made under a
program covered by an agreement under section 1078(b) of this
title.

As used in this section, the term ``eligible loan'' includes all
loans subject to section 1078-9 of this title.

(6) Regulation of time and manner of payment

The Secretary shall pay the holder of an eligible loan, at such
time or times as are specified in regulations, a special allowance
prescribed pursuant to this subsection subject to the condition that
such holder shall submit to the Secretary, at such time or times and
in such a manner as the Secretary may deem proper, such information
as may be required by regulation for the purpose of enabling the
Secretary to carry out his functions under this section and to carry
out the purposes of this section.

(7) Use of average quarterly balance

The Secretary shall permit lenders to calculate interest
benefits and special allowance through the use of the average
quarterly balance method until July 1, 1988.

(c) Origination fees from students

(1) Deduction from interest and special allowance subsidies

Notwithstanding subsection (b) of this section, the total amount
of interest and special allowance payable under section
1078(a)(3)(A) of this title and subsection (b) of this section,
respectively, to any holder shall be reduced by the Secretary by the
amount which the lender is authorized to charge as an origination
fee in accordance with paragraph (2) of this subsection. If the
total amount of interest and special allowance payable under section
1078(a)(3)(A) of this title and subsection (b) of this section,
respectively, is less than the amount the lender was authorized to
charge borrowers for origination fees in that quarter, the Secretary
shall deduct the excess amount from the subsequent quarters'
payments until the total amount has been deducted.

(2) Amount of origination fees

Subject to paragraph (6) of this subsection, with respect to any
loan (other than loans made under sections 1078-3 and 1087-2(o) of
this title) for which a completed note or other written evidence of
the loan was sent or delivered to the borrower for signing on or
after 10 days after August 13, 1981, each eligible lender under this
part is authorized to charge the borrower an origination fee in an
amount not to exceed 3.0 percent of the principal amount of the
loan, to be deducted proportionately from each installment payment
of the proceeds of the loan prior to payment to the borrower.

(3) Relation to applicable interest

Such origination fee shall not be taken into account for
purposes of determining compliance with section 1077a of this title.

(4) Disclosure required

The lender shall disclose to the borrower the amount and method
of calculating the origination fee.

(5) Prohibition on department compelling origination fee
collections by lenders

Nothing in this subsection shall be construed to permit the
Secretary to require any lender that is making loans that are
insured or guaranteed under this part, but for which no amount will
be payable for interest under section 1078(a)(3)(A) of this title or
for special allowances under subsection (b) of this section, to
collect any origination fee or to submit the sums collected as
origination fees to the United States. The Secretary shall, not
later than January 1, 1987, return to any such lender any such sums
collected before October 17, 1986, together with interest thereon.

(6) SLS and PLUS loans

With respect to any loans made under section 1078-1 \3\ or 1078-
2 of this title on or after October 1, 1992, each eligible lender
under this part shall charge the borrower an origination fee of 3.0
percent of the principal amount of the loan, to be deducted
proportionately from each installment payment of the proceeds of the
loan prior to payments to the borrower.
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\3\ See References in Text note below.
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(7) Distribution of origination fees

All origination fees collected pursuant to this section on loans
authorized under section 1078-1 \3\ or 1078-2 of this title shall be
paid to the Secretary by the lender and deposited in the fund
authorized under section 1081 of this title.

(d) Loan fees from lenders

(1) Deduction from interest and special allowance subsidies

Notwithstanding subsection (b) of this section, the Secretary
shall reduce the total amount of interest and special allowance
payable under section 1078(a)(3)(A) of this title and subsection (b)
of this section, respectively, to any holder of a loan by a loan fee
in an amount determined in accordance with paragraph (2) of this
subsection. If the total amount of interest and special allowance
payable under section 1078(a)(3)(A) of this title and subsection (b)
of this section, respectively, is less than the amount of such loan
fee, then the Secretary shall deduct such excess amount from
subsequent quarters' payments until the total amount has been
deducted.

(2) Amount of loan fees

With respect to any loan under this part for which the first
disbursement was made on or after October 1, 1993, the amount of the
loan fee which shall be deducted under paragraph (1) shall be equal
to 0.50 percent of the principal amount of the loan.

(3) Distribution of loan fees

The Secretary shall deposit all fees collected pursuant to
paragraph (3) into the insurance fund established in section 1081 of
this title.

(e) Lending from proceeds of tax exempt obligations

(1) Plan for doing business required

In order for the holders of loans any portion of which were made
or purchased with funds obtained by the holder from an Authority
issuing obligations, the income from which is exempt from taxation
under title 26, to be eligible to receive a special allowance under
subsection (b)(2) of this section, the Authority shall submit to the
Governor of the State, and to the guaranty agency determined by the
Secretary to be the principal guaranty agency for the State, a plan
for doing business. The Governor shall, after consultation with the
guaranty agency, approve or disapprove the plan within 30 days of
the receipt of the proposed plan from the Authority. Such plan shall
also be transmitted to the Secretary within 60 days after approval.

(2) Contents of plan

Each such plan shall contain provisions designed to assure
that--
(A) no eligible lender in the area served by the Authority
will be excluded from participation in the program of the
Authority and all eligible lenders may participate in the
program on the same terms and conditions if eligible lenders are
going to participate in the program;
(B) no director or staff member of the Authority who
receives compensation from the Authority may own stock in, or
receive compensation from, any agency that would contract to
service and collect the loans of the Authority;
(C) student loans will not be purchased from participating
lenders at a premium amounting to more than 1 percent of the
unpaid principal amount borrowed plus accrued interest to the
date of acquisition, but a reasonable loan transfer fee may be
paid by the purchaser;
(D) the Authority will, within the limit of funds available
and subject to the applicable State and Federal law, make loans
to, or purchase loans incurred by, all eligible students who are
residents of, or who attend an eligible institution within, the
area served by the Authority;
(E) the Authority has a plan under which the Authority will
pursue the development of new lender participation in a
continuing program of benefits to students together with
assurances of existing lender commitments to the program; and
(F) there will be an annual audit of the Authority by a
certified public accounting firm which will include review of
compliance by the Authority with the provisions of the plan.

(3) Nondiscrimination

In order for the holders of loans which were made or purchased
with funds obtained by the holder from an Authority issuing
obligations, the income from which is exempt from taxation under
title 26, to be eligible to receive a special allowance under
subsection (b)(2) of this section on any such loans, the Authority
shall not engage in any pattern or practice which results in a
denial of a borrower's access to loans under this part because of
the borrower's race, sex, color, religion, national origin, age,
handicapped status, income, attendance at a particular eligible
institution within the area served by the Authority, length of the
borrower's educational program, or the borrower's academic year in
school.

(4) Report by the Secretary

The Secretary shall, no later than September 30, 1988, and each
succeeding September 30th, submit a report to the Committee on
Education and Labor of the House of Representatives and the
Committee on Labor and Human Resources of the Senate specifying--
(A) the amount of student loan credit provided through the
use of tax-exempt obligations for the most recent fiscal year;
(B) an assessment of the impact of the availability of such
financing on the availability of student credit in the areas
served by the authorities issuing such obligations;
(C) an assessment of the need for additional tax-exempt
financing for student credit for the next fiscal year; and
(D) any other information determined by the Secretary to be
relevant to the purposes of the report.

(f) Regulations to prevent denial of loans to eligible students

The Secretary shall adopt or amend appropriate regulations
pertaining to programs carried out under this part to prevent, where
practicable, any practices which the Secretary finds have denied loans
to a substantial number of eligible students.

(Pub. L. 89-329, title IV, Sec. 438, as added Pub. L. 99-498, title IV,
Sec. 402(a), Oct. 17, 1986, 100 Stat. 1414; amended Pub. L. 100-50,
Sec. 10(d)(2), (bb), (cc), June 3, 1987, 101 Stat. 342, 347; Pub. L.
100-369, Sec. 7(c), July 18, 1988, 102 Stat. 837; Pub. L. 102-325, title
IV, Sec. 430, July 23, 1992, 106 Stat. 553; Pub. L. 103-66, title IV,
Secs. 4102(a), 4103, 4105, 4111, Aug. 10, 1993, 107 Stat. 366, 367, 368,
370.)

References in Text

Section 1078-1 of this title, referred to in subsecs. (b)(2)(C),
(5)(A)(ii) and (c)(6), (7), was repealed by Pub. L. 103-66, title IV,
Sec. 4047(b)-(d), Aug. 10, 1993, 107 Stat. 364, eff. July 1, 1994,
except with respect to loans provided under that section as it existed
prior to Aug. 10, 1993.


Prior Provisions

A prior section 1087-1, Pub. L. 89-329, title IV, Sec. 438, as added
Pub. L. 92-318, title I, Sec. 132E(a), June 23, 1972, 86 Stat. 264;
amended Pub. L. 94-482, title I, Sec. 127(a), Oct. 12, 1976, 90 Stat.
2133; Pub. L. 95-43, Sec. 1(a)(37), June 15, 1977, 91 Stat. 216; Pub. L.
96-49, Sec. 5(c)(1), Aug. 13, 1979, 93 Stat. 352; Pub. L. 96-374, title
IV, Secs. 420(a), 451(d), title XIII, Sec. 1391(a)(1), Oct. 3, 1980, 94
Stat. 1425, 1458, 1503; Pub. L. 97-35, title V, Secs. 532(b)(4), 534(b),
536(a), Aug. 13, 1981, 95 Stat. 452, 454, 455; Pub. L. 98-79, Sec. 7(a),
(c), Aug. 15, 1983, 97 Stat. 482, 483; Pub. L. 99-272, title XVI,
Secs. 16013(d), 16017(b)(3), (c), Apr. 7, 1986, 100 Stat. 340, 347,
related to special allowances, prior to the general revision of this
part by Pub. L. 99-498.
A prior section 1087-1a, Pub. L. 96-374, title IV, Sec. 420(b), Oct.
3, 1980, 94 Stat. 1427, related to eligibility for special allowances
covering loans made or purchased with funds obtained from Authorities
issuing tax exempt obligations, and established requirement relating to
plans for doing business, prior to repeal by Pub. L. 98-79, Sec. 7(b),
Aug. 15, 1983, 97 Stat. 483. See section 1087-1(d) of this title.


Amendments

1993--Subsec. (b)(2)(A). Pub. L. 103-66, Sec. 4111(1), substituted
``subparagraphs (B), (C), (D), (E), and (F)'' for ``subparagraphs (B),
(C), and (D)'' and ``section 1077a(f)'' for ``section 1077a(e)''.
Subsec. (b)(2)(B)(iv). Pub. L. 103-66, Sec. 4105, added cl. (iv).
Subsec. (b)(2)(E), (F). Pub. L. 103-66, Sec. 4111(2), added subpars.
(E) and (F).
Subsec. (c). Pub. L. 103-66, Sec. 4102(a)(1), inserted ``from
students'' after ``origination fees'' in heading.
Subsec. (c)(2). Pub. L. 103-66, Sec. 4102(a)(2)(A), substituted
``sections 1078-3 and 1087-2(o)'' for ``sections 1078-1, 1078-2, 1078-3,
and 1087-2(o)'' and ``3.0 percent'' for ``5 percent''.
Subsec. (c)(6). Pub. L. 103-66, Sec. 4102(a)(2)(B), substituted
``3.0 percent'' for ``5 percent''.
Subsecs. (d) to (f). Pub. L. 103-66, Sec. 4103, added subsec. (d)
and redesignated former subsecs. (d) and (e) as (e) and (f),
respectively.
1992--Subsec. (b)(2)(A). Pub. L. 102-325, Sec. 430(a)(1), (2),
substituted ``3.10'' for ``3.25'' and inserted at end ``If such
computation produces a number less than zero, such loans shall be
subject to section 1077a(e) of this title.''
Subsec. (b)(2)(B)(i). Pub. L. 102-325, Sec. 430(a)(3), substituted
``3.10'' for ``3.25''.
Subsec. (b)(2)(B)(ii). Pub. L. 102-325, Sec. 430(a)(4), added cl.
(ii) and struck out former cl. (ii) which read as follows: ``The rate
set under division (i) shall not be less than (I) 2.5 percent per year
in the case of loans for which the applicable interest rate is 7 percent
per year, (II) 1.5 percent per year in the case of loans for which the
applicable interest rate is 8 percent per year, or (III) 0.5 percent in
the case of loans for which the applicable rate is 9 percent per year.''
Subsec. (b)(2)(C). Pub. L. 102-325, Sec. 430(a)(5), designated
existing provision as cl. (i), inserted ``before October 1, 1992,''
after ``made'', and added cl. (ii).
Subsec. (b)(2)(D)(i). Pub. L. 102-325, Sec. 430(a)(6), substituted
``3.10'' for ``3.25''.
Subsec. (b)(5). Pub. L. 102-325, Sec. 430(c), inserted closing
provision which defined ``eligible loan'' as used in this section to
include all loans subject to section 1078-9 of this title.
Subsec. (b)(5)(A)(ii). Pub. L. 102-325, Sec. 430(b), inserted
``1078-8,'' after ``1078-3,''.
Subsec. (c)(2). Pub. L. 102-325, Sec. 430(d)(1), substituted
``Subject to paragraph (6) of this subsection, with'' for ``With''.
Subsec. (c)(6), (7). Pub. L. 102-325, Sec. 430(d)(2), added pars.
(6) and (7).
Subsec. (d)(2)(C). Pub. L. 102-325, Sec. 430(e), struck out ``or
discount'' after ``premium''.
1988--Subsecs. (b)(2)(B)(i), (d)(1), (3). Pub. L. 100-369
substituted ``Internal Revenue Code of 1986'' for ``Internal Revenue
Code of 1954'', which for purposes of codification was translated as
``title 26'' thus requiring no change in text.
1987--Subsec. (b)(2)(B)(iii). Pub. L. 100-50, Sec. 10(bb)(1),
substituted ``subsection (d) of this section'' for ``subsection (c) of
this section''.
Subsec. (b)(2)(C). Pub. L. 100-50, Sec. 10(d)(2), substituted ``12
percent'' for ``12.5 percent''.
Subsec. (b)(7). Pub. L. 100-50, Sec. 10(bb)(2), added par. (7).
Subsec. (d)(4)(C). Pub. L. 100-50, Sec. 10(cc), struck out ``, as
evidenced by the information submitted under paragraph (2)(G) of this
subsection'' after ``fiscal year''.

Change of Name

Committee on Education and Labor of House of Representatives treated
as referring to Committee on Economic and Educational Opportunities of
House of Representatives by section 1(a) of Pub. L. 104-14, set out as a
note preceding section 21 of Title 2, The Congress. Committee on
Economic and Educational Opportunities of House of Representatives
changed to Committee on Education and the Workforce of House of
Representatives by House Resolution No. 5, One Hundred Fifth Congress,
Jan. 7, 1997.


Effective Date of 1993 Amendment

Amendment by section 4102(a) of Pub. L. 103-66 effective July 1,
1994, see section 4102(d) of Pub. L. 103-66, set out as a note under
section 1078 of this title.


Effective Date of 1992 Amendment

Amendment by Pub. L. 102-325 applicable with respect to loans for
which first disbursement is made on or after Oct. 1, 1992, see section
432(a)(13) of Pub. L. 102-325, set out as a note under section 1078 of
this title.


Effective Date of 1987 Amendment

Amendment by Pub. L. 100-50 effective as if enacted as part of the
Higher Education Amendments of 1986, Pub. L. 99-498, see section 27 of
Pub. L. 100-50, set out as a note under section 1001 of this title.


Effective Date

Section effective Oct. 17, 1986, with subsec. (b) of this section
effective with respect to loans disbursed on or after 30 days after Oct.
17, 1986, or made to cover the costs of instruction for periods of
enrollment beginning on or after 30 days after Oct. 17, 1986, and
subsec. (d) of this section effective 30 days after Oct. 17, 1986, see
section 402(b) of Pub. L. 99-498, set out as a note under section 1071
of this title.

Section Referred to in Other Sections

This section is referred to in sections 1078, 1078-3, 1078-8, 1082
of this title; title 2 section 906; title 26 sections 144, 148; title 42
section 292e.


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This page was last updated on November 13, 2000

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