42 U.S.C. § 292g — Risk-based premiums

(a) Authority For loans made on or after January 1, 1993, the Secretary must charge a risk-based premium, based on the borrower's school's default rate (as defined in section 292o). (b) Assessment of premium Unless subsection (d)(2) applies, the premium works like this: (1) Low-risk rate: If the school's default rate is 5 percent or less, the borrower pays a premium equal to 6 percent of the loan's principal. (2) Medium-risk rate: If the school's default rate is over 5 percent but not more than 10 percent — (A)(i) the borrower pays 8 percent of the loan's principal, and (ii) the school itself pays a premium equal to 5 percent of the loan's principal. (B) The school must also submit an annual default-management plan to the Secretary, laying out its short- and long-term steps to cut defaults — including an exit interview for every borrower covering repayment, deferment, forbearance, and what happens if they default. (3) High-risk rate: If the school's default rate is over 10 percent but not more than 20 percent — (A)(i) the borrower pays 8 percent, and (ii) the school pays a premium equal to 10 percent of the loan's principal. (B) The school must submit a default-management plan meeting the same requirements as in (2)(B). (4) Ineligibility: A student can't get a loan under this subpart to attend a school with a default rate over 20 percent. (c) Reduction of risk-based premium If a creditworthy parent or other responsible person co-signs the loan, the borrower's risk-based premium is cut by half. (d) Administrative waivers (1) Before making a school ineligible, the Secretary must give it at least one hearing, and may weigh mitigating circumstances. (2) The Secretary can waive the rules in (b)(2) through (4) for a school if its default rate isn't a reliable number because it hasn't made enough loans under this subpart. (3) For the 3 years starting October 13, 1992: (A) the over-20-percent ineligibility rule in (b)(4) doesn't apply to Historically Black Colleges and Universities; and (B) if such a school still has a default rate over 20 percent, it and its borrowers are instead treated under the high-risk rules in (b)(3). (e) Payoff to reduce risk category A school can pay off the outstanding principal and interest owed by its own students who defaulted, in order to lower its own risk category.