| AwardYear: 1996-1997 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 2 SectionTitle: Making & Disbursing Loans PageNumbers: 11-20 [[NEW]] [[34CFR 674.16(c)(2)]] The definition of "making a loan" has been changed. A Federal Perkins Loan or National Direct Student Loan (NDSL) is now considered to be made when the borrower has signed the promissory note for the award year and the school makes the first disbursement of loan funds under that promissory note for that award year. Prior to 1996-97, a borrower was required to sign the promissory note for each advance AT THE TIME he or she received each disbursement, and a loan was considered to be made when the borrower signed for an advance of loan funds and those funds were disbursed. Beginning July 1,1996, the student is required to sign the promissory note only once each award year. The borrower must sign before the school disburses any loan funds to him or her under that note for that award year. However, a school may continue to require a borrower to sign for each advance if it chooses to do so. The new signature requirement applies in the case of either a "closed-end" promissory note or an "open-ended" promissory note. (See page 6-18 for definitions of open-ended and closed-end promissory notes.) [[Financial need - Other resources = Maximum loan eligibility]] A financial aid administrator may not award or disburse a Perkins Loan or NDSL to a student if the combination of that loan and all of the student's other resources would exceed the student's need. The aid administrator must take into account those resources that he or she can reasonably anticipate at the time aid is awarded to the student, those the school makes available to its students, or those the aid administrator knows about. A list of resources and a discussion of overawards are in Chapter 5, Section 2. [[34CFR 668.161 through 668.166]] The regulations now provide uniform cash management rules, which became effective July 1, 1995, for the Student Financial Assistance (SFA) Programs. These provisions cover disbursing funds to a student, crediting a student's account, calculating allowable charges, and holding student loans, and they are discussed in Chapter 3, Section 3. The major provisions affecting Perkins Loan disbursement are discussed on page 6-19. LOAN MAXIMUMS If a student is attending a school that does NOT participate in the Federal Perkins Loan Program's Expanded Lending Option (ELO), which is discussed below, the maximum annual amount an eligible student may borrow is - $3,000 per award year for a student who has not successfully completed a program of undergraduate education or - $5,000 per award year for a graduate or professional student. The maximum cumulative amount an eligible student may borrow at schools that do NOT participate in the ELO is - $15,000 for a student who has not successfully completed a program of undergraduate education or - $30,000 for a graduate or professional student, including loans borrowed as an undergraduate student. [[Expanded Lending Option (ELO)]] A school that maintains a cohort default rate of 15% or less may participate in the ELO if the school has signed an ELO participation agreement with ED. (Cohort default rates are discussed in Section 8 of this chapter.) Schools participating in the ELO are required to match the Federal Capital Contribution (FCC) on a dollar-for-dollar basis, and they may make loans to students at higher annual and cumulative loan limits than nonparticipating schools. [[Loan limits at ELO schools]] If a student is attending a school that participates in the ELO, the maximum annual amount the student may borrow is - $4,000 per award year for a student who has not successfully completed a program of undergraduate education or - $6,000 per award year for a graduate or professional student. The maximum cumulative amount an eligible student may borrow at a school that participates in the ELO is - $20,000 for a student who has successfully completed two years of a program leading to a bachelor's degree but who has not completed the work necessary for the degree; - $40,000 for a graduate or professional student, including loans borrowed as an undergraduate student; or - $8,000 for all other students. [[Effect of repayment on loan limit]] All of the cumulative maximum amounts listed here include all Defense Loans, NDSLs, and Federal Perkins Loans a borrower may have. Unlike repayment in the Federal Family Education Loan (FFEL) Program, repayment in the Perkins Loan Program does not establish a new cumulative loan limit. For example, a student who had borrowed the maximum cumulative amount for a graduate or professional student would not be eligible for another loan even if the student had repaid part or all of the amount he or she borrowed. [[Study abroad]] A student engaged in a program of study abroad may receive a Perkins Loan provided that he or she meets all eligibility requirements. A student studying abroad in a program approved for credit by the home school where the student is enrolled may exceed the annual and/or cumulative loan limits by 20% if reasonable costs of the program exceed the cost of attending the home school. [[Loans limits for teacher-certification students]] A student enrolled in a teacher certification program may be considered either an undergraduate or a graduate student. This determination is left to the student's school. The borrowing limit for a student enrolled in a teacher certification program depends on the school's determination of his or her status (undergraduate or graduate). A teacher-certification student who is considered to be a graduate student and who has already borrowed the cumulative maximum allowed for an undergraduate is eligible to receive an additional Perkins Loan or NDSL. A teacher-certification student who is considered to be an undergraduate student and who has already borrowed the cumulative maximum allowed for an undergraduate is not eligible to receive an additional Perkins Loan or NDSL. COUNSELING STUDENTS [[School must provide certain information]] BEFORE MAKING THE FIRST FEDERAL PERKINS LOAN OR NDSL DISBURSEMENT, the school must have the student sign the promissory note. (See Section 2 of this chapter.) The school must also furnish the student with certain information. It must inform the student about his or her rights and responsibilities under the Federal Perkins Loan Program, and it must inform him or her that the loan may be used only for educational expenses and that he or she must repay the loan. The school should also make sure the student knows that the SCHOOL holds the promissory note. A school must also provide the student with the following information in writing before making the first loan disbursement: 1. the name of the school and the addresses where payments and communications should be sent; 2. a statement indicating that the school will report the outstanding balance of the loan to a national credit bureau at least annually; 3. the principal amount of the loan; 4. the stated interest rate; 5. the maximum yearly and cumulative amounts the student may borrow; 6. an explanation of when the student must start repayment and when he or she must begin paying the interest that accrues; 7. the maximum and minimum repayment terms the school may impose and the minimum monthly payment required; 8. a statement of the total cumulative balance owed by the student to that school and an estimate of the monthly payment amount needed to repay that balance; 9. options the borrower may have to consolidate or refinance; 10. the borrower's right to prepay all or part of the loan at any time without penalty; 11. a summary of circumstances in which repayment of the loan principal or interest may be deferred or canceled, including a brief notice about the Department of Defense program for repaying loans based on certain military service; 12. a definition of default and the consequences for the borrower, including a statement that the school may report the default to a national credit bureau; 13. the effect that accepting the loan will have on the borrower's eligibility for other types of student aid; 14. a complete list of charges connected with making the loan, including whether those charges are deducted from the loan or whether the student must pay them separately; and 15. an explanation of the costs that may be assessed the student in collecting the loan, such as late charges and collection and litigation costs. The school must provide this information to the student--in writing-- as part of the application material, as part of the promissory note, or on a separate form. Although the information can be mailed to a student, it is preferable for the aid administrator to meet with the student to answer any questions and to emphasize his or her responsibility to repay the loan. [[Obtain information from students]] The school is encouraged to use this initial counseling session to obtain the following information from a student: - the student's name, current address, and Social Security Number; - the student's parents' permanent address; - the student's and his or her parents' telephone numbers; - the student's expected date of graduation; - the student's spouse's name and address; - the student's spouse's employer; - the names and addresses of two or three of the student's personal acquaintances; and - the student's drivers license number, if any. This information could be valuable later for use in collection procedures, and it will help the school locate a student who leaves school without notice or who does not attend the exit interview. Effective pre-loan counseling sessions will satisfy the school's requirement to tell each borrower about his or her rights and obligations and to provide information about the requirement to repay the loan. However, this counseling may not be used to satisfy the requirement for an exit interview. (See Section 6 of this chapter for more information.) THE PROMISSORY NOTE The promissory note is the legally binding document that is evidence of a borrower's indebtedness to a school. A student must sign this note before he or she can receive any Perkins Loan funds and must be given a copy of the note at (or before) the exit interview. The note includes information about the loan's interest rate, repayment terms, and minimum rates of repayment; deferment, forbearance, and cancellation provisions; collection costs; attorney fees; and late charges. [[NEW]] [["Dear Colleague" letters CB-93-9 and CB-96-8]] ED has issued two sets of different promissory notes, either of which a school may use. "Dear Colleague" letter CB-93-9, dated July 1993, included information and sample promissory notes. ED issued redesigns of the July 1993 promissory notes in "Dear Colleague" letter 96-8, dated May 1996. Both sets of notes (July 1993 and May 1996) include all changes required by the Higher Education Amendments of 1992. A school is not required to use the redesigned notes. A school, however, is required to use a promissory note that the Secretary has approved. A promissory note must state that the school is required to disclose to any one of the national credit bureaus with which ED has an agreement the amount of the loan made to the borrower along with other relevant information. The note must also state that if the borrower defaults on the loan, the school is required to disclose the default and any other relevant information to the same national credit bureau to which it originally reported the loan. Since the 1993-94 award year, a school has been required to provide this information to a borrower in writing but not necessarily on the promissory note. The requirement to provide this information on the promissory note became effective with the 1995-96 award year. [[Minor who signs promissory note]] The Higher Education Amendments of 1992 eliminated the "defense of infancy," whereby the signing of a contract by a minor would not create a binding obligation. Under this provision of the law, a minor may sign a promissory note without an endorser or any security, and the minor who signs is responsible for repayment regardless of any state law to the contrary. If the school does not have a valid note or other written evidence that would be upheld in a court of law, the school has no recourse against a borrower who defaults. In such cases, the school would have to repay to its Perkins Loan fund any amounts loaned, whether recovered from the borrower or not, as well as any ACA claimed on those amounts. Two examples of invalid notes are notes that have been changed after they were signed and notes without proper signatures or dates for loan advances. COMPARISON OF JULY 1993 NOTES WITH MAY 1996 NOTES [[NEW]] ED redesigned the July 1993 promissory notes to facilitate implementing the signature requirement change, which allows a school to obtain a borrower's signature on the note only once each award year, rather than each time a disbursement is made. The May 1996 promissory note is a single-page (front and back) document. Separate promissory notes based on the borrower's enrollment status (half time or greater or less than half time) have been eliminated, as were separate sections for obtaining information on prior Federal Perkins Loans and for obtaining a borrower's signature for each loan advance. There are no new provisions in the May 1996 notes. A school still has the option of using a closed-end or open-ended note. The sample promissory notes issued in July 1993 are open-ended notes. Those issued in May 1996 are provided in both formats. As stated previously, a school is not required to use the May 1996 notes. If a school chooses to use the July 1993 promissory notes, it will be required to obtain the borrower's signature for each advance (disbursement) of the loan. A SCHOOL MAY NOT ALTER THE JULY 1993 PROMISSORY NOTES TO REFLECT THE CHANGED SIGNATURE REQUIREMENT. A borrower for whom the school uses a July 1993 note is required to sign at the end of the last page of the note. SCHOOL-DESIGNED NOTE A school may develop its own notes, which may include some or all of the optional provisions in the ED-provided note. However, a school-designed note must include all of the required information and must be based on the sample notes ED has provided. A school may not change the text or the order of the text in the ED-provided notes, and a school may not add provisions to the note. The school may add such information as the student's driver's license number to the note. There is no minimum size of type or print specified for the notes. However, the notes must be legible so that a borrower would not be able to claim a defense against repayment of the loan because the print was too small to be read. MINIMUM MONTHLY PAYMENT OPTION [[July 1993 promissory notes]] Optional provisions regarding a minimum monthly payment amount are included in the July 1993 sample promissory notes (bracketed paragraphs III(5)(A) and III(5)(B)), and a school may choose to include these provisions. However, a school must either include both paragraphs or omit both paragraphs. If a school includes both paragraphs in the promissory note, the note must state the exact minimum monthly payment amount. If a school does not include the minimum monthly payment option in the note, the school may not require a minimum monthly payment amount from the borrower. [[May 1996 promissory notes]] The optional provision regarding a minimum monthly payment amount is included as a single, optional sentence at the end of the repayment paragraph on page 1 of the May 1996 promissory notes. A school would include this sentence in the promissory note if the school is exercising the minimum monthly payment amount provision. Page 2 of the May 1996 promissory notes includes a summary of this provision. If the optional provisions are included in the school's note, a minimum monthly payment of $40 is required for a loan made on or after October 1, 1992 to a borrower who had no outstanding balance on a Perkins Loan, NDSL, or Defense Loan on the date the loan was made. (For other borrowers, the monthly minimum amount remains $30.) CLOSED-END AND OPEN-ENDED PROMISSORY NOTES If a school is developing its own notes, it may use either "closed- end" ("limited") or "open-ended" notes. A note may be printed on more than one sheet of paper if the borrower signs each page or if each page contains the number of that page plus the total number of pages in the note (for example, page 1 of 3, page 2 of 3). [[Time limit for closed-end notes]] - "CLOSED-END" OR "LIMITED" NOTE. This note is valid for not more than 12 months and usually covers one award year or one academic year. It may also be used for a single academic term. The loan amount must be entered in the note. Closed-end notes can be designed for a single disbursement (if the award is less than $501) or multiple disbursements. If a school uses multiple disbursements and uses the July 1993 promissory notes, the borrower must sign for each advance. If there will be only one disbursement, the borrower's signature at the end of the note is sufficient. - "OPEN-ENDED" NOTE. If a school uses an open-ended note, it does not have to issue new notes for future loans it makes to the same borrower UNLESS the requirements of the Federal Perkins Loan Program are changed by statute or regulation. An open- ended note may be used for several years. The sample notes in "Dear Colleague" letter CB-93-9 are open- ended notes. This open-ended note does not itself contain the specific amount of the approved loan. Instead, at the time of each disbursement, the school must enter the amount advanced and the date of receipt in the "Schedule of Advances," which is a part of the note. The borrower must sign this schedule EACH TIME he or she receives a disbursement. IT IS NOT ACCEPTABLE PRACTICE FOR THE STUDENT TO SIGN IN ADVANCE. "Dear Colleague" letter CB-96-8 also provides an open-ended note. Unlike the July 1993 open-ended note, this open-ended note contains the specified amount of the approved loan for each award year. [[Requirements for loans that have been paid in full]] When a borrower has fully repaid a loan, the school must mark the note "paid in full," have it certified by an official of the school, and give the original note to the borrower. The school must keep a copy of the note for at least five years after the date the loan was repaid in full. DISBURSING FUNDS A school may not disburse funds for a payment period until the student enrolls for that period. The regulations now provide uniform cash management rules for all SFA programs. These rules are discussed in this handbook in Chapter 3, Section 3. These regulations became effective for the 1995-96 award year. The school must report the disbursement and amount of each Perkins Loan or NDSL to a national credit bureau with which ED has an agreement. See Section 10, "Credit-Bureau Reporting," for further details on complying with this requirement. [[34CFR Section 674.16(f)]] Keep in mind that if a school makes payments before the student begins attendance, it must accept responsibility for any overpayment. If a student withdraws--or is expelled--before the first day of classes, for example, all funds disbursed are considered an overpayment and must be restored to the Federal Perkins Loan fund. A student who never begins class is considered to have withdrawn. [[Power of attorney--34CFR Section 674.16(i)]] A school official may not obtain a student's power of attorney to endorse any check used to disburse funds or to sign for any loan advance unless ED has granted prior approval. ED would not grant such a power of attorney unless the school could demonstrate that there is no one else (such as a relative, landlord, or member of the clergy) who could act on behalf of the student. There are no exceptions to gaining prior approval to obtain a student's power of attorney. For a student studying abroad, the school does not automatically obtain the student's power of attorney; the school will still be required to request ED's approval and to demonstrate that there is no one else who can act on behalf of the student. [[Disbursing at standard-term schools]] If a school is making a loan for a full academic year and uses standard academic terms, the school must advance a portion of the loan during each payment period. Payment periods are defined as semesters, trimesters, or quarters. The amount advanced is usually determined by dividing the award by the number of payment periods in the academic year. [[Disbursing at nonstandard-term schools]] If the school does not use standard academic terms, it must advance funds at least twice during the academic year--once at the beginning and once at the midpoint. Normally, no more than half the loan may be advanced before the midpoint. A school must also advance funds at least twice during an eligible six-month training program. [[Student attending less than a full academic year]] For a student attending less than a full academic year, the amount advanced is determined by dividing the award by the number of payment periods the student will attend in the academic year. Only one payment is necessary if the total Perkins Loan amount awarded to a student for an academic year is less than $501. [[Uneven costs]] If a student incurs uneven costs or resources during an academic year and needs additional funds during a payment period, the school may advance the additional amount REGARDLESS OF WHETHER THE SCHOOL USES STANDARD ACADEMIC TERMS. Suppose that a student who will receive a $1,000 Perkins Loan must spend $300 for books and supplies at the beginning of the school year. That $300 could be disbursed along with the first payment. To determine the first payment, subtract the extra amount (in this case, $300) from the total loan and divide the remainder by the number of payment periods. The regular amount for one payment period is then added to the extra amount to determine the initial payment. A school that has a two-semester system would determine the payments as follows: [[The calculation on page 6-20 is currently unavailable for viewing. Please reference your paper handbook for additional information.]] Within a payment period, the school may advance funds in whatever installments it determines will best meet the student's needs. |