| AwardYear: 1995-1996 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Programs SectionNumber: 6 SectionTitle: Comparing Loan Programs PageNumbers: 57-74 In Sections Two, Three, and Four the loan provisions that differ significantly between the Federal Stafford and Federal PLUS programs were discussed; here, those that are essentially the same for all FFEL programs are presented, along with comparison of some program elements. A comparison of deferment provisions for the FFEL programs is at the end of this section. [[Common application for Stafford Loans]] A common loan application form and promissory note that can be used to apply for a subsidized or unsubsidized Stafford Loan is now available from guarantors and lenders. The common deferment form was mailed to all guaranty agencies on March 30, 1994. The PLUS common application was approved on April 29, 1994. The Higher Education Amendments of 1992 encourage lenders to treat all loans of the same type as one loan for billing purposes and deferment periods. This means that a borrower with several Stafford Loans held by a single lender would receive one billing notice for all of those loans, and any deferment received for one of the loans would be extended to all of the borrower's Stafford Loans held by that lender. In addition, guaranty agencies must try to ensure that a borrower's loans are maintained by one lender, one holder of the loan, one loan servicer, and one guaranty agency, to reduce the number of agencies contacting the borrower. These efforts to simplify loan repayment will be made with the cooperation of the borrower. On the following page is a comparison of loan limits for Stafford, unsubsidized Stafford, and PLUS borrowers. For more detail, especially on loan limits for less than a full year of study, see "Loan Limits" in Sections Two, Three, and Four. [[The chart "Loan Limits on page 10-58 is currently unavailable for viewing. Please reference your paper document for additional information.]] Consolidation Loans may have different interest rates and deferment conditions from the loans included in the consolidation package. Borrowers should be reminded during exit counseling to look at differences in loan terms and conditions when considering loan consolidation. See the preceding section for information about consolidating loans. PROVISIONS COMMON TO ALL LOANS The following conditions are essentially the same for all FFEL borrowers: CAPITALIZATION Capitalization is the addition of accrued interest and unpaid insurance premiums (if applicable) to a borrower's loan principal. Interest accruing during the period from the date of first disbursement of the loan to the beginning of the borrower's enrollment period, and during the period from the date the first loan payment was due until it was made, may be capitalized on the date repayment is scheduled to begin. Interest may be capitalized quarterly, and again when repayment begins or resumes-- - during an in-school or grace period, if capitalization is authorized in the promissory note, or approved by the borrower; - during approved deferment periods (for example, during deferment of principal for an SLS, PLUS, or unsubsidized Stafford Loan); or - during an approved forbearance period, such as one following a required medical or dental internship. If a borrower has agreed to pay interest during a deferment or forbearance period or during an in-school grace period, and fails to resolve a delinquency in making those payments, the lender also may, after notifying the borrower, capitalize the delinquent interest and all interest accruing for the remainder of the period of deferment or forbearance. Borrowers should understand that capitalization of interest increases the principal balance of the loan. FORBEARANCE [[Forbearance definition]] If, because of poor health or other unanticipated personal problems, a borrower (or endorser) is willing but financially unable to make the required payments on an FFEL, he or she may request the lender to grant forbearance. Forbearance means permitting the temporary cessation of payments, allowing an extension of time for making payments, or temporarily accepting smaller payments than were previously scheduled. The lender may grant forbearance of principal, interest, or both. Forbearance usually requires a WRITTEN AGREEMENT between borrower and lender. When forbearance is granted, the borrower is always responsible for repayment of accrued interest charges. While lenders do not have to grant forbearance (in most cases), they are encouraged to do so in order to prevent the borrower from defaulting on the loan. If two persons are jointly liable for repayment of a PLUS or Consolidation Loan, the lender may grant forbearance only if BOTH persons are unable to make the required payments. A lender may grant forbearance to permit a borrower or endorser to resume payment on a loan after default. Such a forbearance agreement requires a new signed repayment obligation. [[Administrative forbearance]] Administrative forbearance does not require the agreement of the borrower, and may be granted only under specified conditions. Upon notifying the borrower, a lender may grant forbearance for payments of interest and principal that are overdue- - when a deferment is granted, and the lender later learns that the borrower did not qualify for the deferment; - at the beginning of a deferment period; - during the period between the time the borrower entered repayment until the first payment was due; - during a period of national military mobilization, such as occurred during Operation Desert Storm or Desert Shield; or - during a period prior to a borrower's filing of bankruptcy. The Higher Education Amendments of 1992 permit a lender to grant administrative forbearance- - during a period not to exceed 60 days after a lender learns of a borrower's death or total and permanent disability, and documentation of those conditions is received; - for a period of delinquency at the time a loan is sold or transferred, if the borrower or endorser is less than 60 days delinquent on the loan at the time of sale or transfer; or - for periods necessary to determine a borrower's eligibility for loan discharge because of past attendance at a closed school, or because of false certification of loan eligibility; or, for periods necessary for the Department to determine a borrower's or endorser's eligibility for bankruptcy. [[Mandatory forbearance]] Lenders MUST grant mandatory forbearance of both principal and interest (if requested) to FFEL borrowers in the circumstances listed below. The documentation necessary to apply for a forbearance is described in part 682.211(i)(3) of the FFEL regulations. - If a borrower serving in a medical or dental internship or residency program has already received the two-year internship deferment. Forbearance in this instance must be cessation of all payments unless the borrower requests forbearance as an extension of time for making payments, or requests that payments be reduced during the forbearance. The forbearance is renewable at 12-month intervals while the borrower remains in the internship/residency program. The borrower must request forbearance in writing for each 12-month period. - If a borrower's amount of student loan payments is collectively equal to or greater than 20 percent of the borrower or endorser's total monthly income. The forbearance is renewable in yearly increments for periods of time that collectively do not exceed three years. - If a borrower is serving in a national service position for which he or she received a national service education award under the National and Community Service Trust Act of 1993. The forbearance is renewable in yearly increments for as long as a borrower serves in this capacity. [[New Mandatory forbearance provisions]] - If a borrower is eligible for forgiveness of a loan under the Federal Stafford Loan Forgiveness Demonstration Program because of certain public service under the terms explained in section 682.215(b) of the FFEL regulations (if the program is funded). The length of time for which a forbearance may be granted is the same as described above for borrowers serving in national service positions. - If a borrower is eligible for partial repayment of a loan under the Student Loan Repayment Programs administered by the Department of Defense under 10 U.S.C. 2171. [[Mandatory administrative forbearance]] Lenders must grant a mandatory administrative forbearance to FFEL borrowers in the circumstances listed below. - During a period of up to three years where the effect of a variable interest rate change causes the extension of the maximum repayment term, under a standard or graduated repayment schedule. - During a period of up to five years when an income-sensitive repayment schedule causes the extension of the maximum repayment term. - Exceptional circumstances such as a local or national emergency or a military mobilization. Borrowers subject to a military mobilization must provide supporting documentation as proof. - The geographical area in which the borrower resides has been designated a state or federal disaster area. Borrowers in this situation are not required to submit a request for forbearance or to submit supporting documentation. CANCELLATION If an FFEL borrower dies or becomes totally and permanently disabled, the borrower's obligation to repay the loan is cancelled and the holder of the loan may not collect the loan from an endorser or from the borrower's estate. Certification of total and permanent disability from a qualified physician is required for loan cancellation. A PLUS loan borrower's debt will be cancelled if the student for whom the parent borrowed the PLUS dies. The endorser (cosigner) of a loan cancelled due to death or total disability is not obligated to repay the loan. However, if parents borrow jointly under the PLUS program as endorsers or if a couple consolidates a loan jointly, the death or total disability of one parent or spouse does not relieve the other of responsibility for repaying the loan. This is true unless both borrowers have a condition (not necessarily the same one) under which a borrower can qualify for loan cancellation; in this case, both individuals' loans can be cancelled. If a borrower whose loan was written off wishes to borrow again under the FFEL programs, the borrower must reaffirm the previous loan amount. (As explained in the November 29, 1994 FFELP Final Rule, "written off" means that the Department or the appropriate guaranty agency has ceased collection activity on a defaulted loan after several unsuccessful attempts have been made to collect on the loan.) In addition, the borrower must make "satisfactory repayment arrangements" on the defaulted debt. Please see page 10-69 for an explanation of this term. [[Reaffirmation-definition]] Reaffirmation means legal acknowledgment of the loan, which may require the borrower to-- - sign a new promissory note or repayment schedule for the previously cancelled loan; or - make a payment on the loan. Please note that when loans are reaffirmed, they count toward the borrower's aggregate loan limits. [[Bankruptcy discharge]] A borrower may also have his or her loan discharged in bankruptcy. Please note that a borrower whose FFEL Loan was previously discharged in bankruptcy is no longer required to reaffirm his or her loan obligation. This is consistent with the Bankruptcy Reform Act of 1994 enacted October 22, 1994. Passage of this law affirms that borrowers who have previously sought bankruptcy must not be discriminated against by lenders when applying for loans. However, past bankruptcy can be included as a factor in determining the future creditworthiness of a loan applicant. [[Changes in reaffirmation policy]] There is another category of borrowers for which the Department no longer requires reaffirmation: those whose debts were previously cancelled due to a determination of permanent and total disability. A borrower whose loan debt was cancelled due to total and permanent disability, and who later applies for an FFEL Loan, must- - provide a physician's certification that he or she is able to engage in "substantial gainful activity" such as working or attending school; and - sign a statement affirming that the loan cannot be cancelled in the future based on present impairment, unless the borrower's condition substantially deteriorates. OTHER LOAN CANCELLATION PROVISIONS [[Closed school and false certification discharges]] A student borrower's obligation to repay a Stafford or SLS loan or a parent borrower's obligation to repay a PLUS received on or after January 1, 1986 will be cancelled if the borrower was unable to complete his or her program of study because the school closed, or if the borrower withdrew from the school not more than 90 days before the school closed. This 90-day period may be extended on a case- by-case basis if deemed appropriate by the Secretary. Also, the borrower's obligation to repay may be cancelled if the borrower's eligibility for the loan was falsely certified by the institution. If the school falsely certified that a student had the ability to benefit from its training, or signed the borrower's name without authorization by the borrower on the loan application or promissory note, the loan may be discharged under this provision. This is considered false certification by the school based (in the first case) on student eligibility to borrow, and (in the second case) on unauthorized signature. In the case of an electronic funds transfer, the borrower must certify that he or she did not endorse the loan check or sign the authorization for electronic funds transfer, or authorize the school to do so. The borrower must state that he or she did not receive the proceeds of the contested disbursement either through actual delivery of the loan funds or by a credit to the school's account. Interest and collection fees, as well as loan principal, will be discharged. The Department will attempt to collect from the school the loan amount discharged, including any refund owed the student. If a borrower's defaulted loans are discharged under these provisions, the borrower, if otherwise eligible, regains eligibility for federal student financial assistance (SFA) grants and loans. In addition, any adverse credit history will be deleted from credit reporting agencies' records. The period of study the student was unable to complete because of a school's closing will not be counted in calculating the student's eligibility for additional student financial assistance. The Department published a Final Rule dated April 29, 1994 which clarifies the eligibility criteria and application procedures for a closed school or false certification discharge. Subregulatory guidance is provided in a September 1994 "Dear Colleague" letter (94-L-166). LOAN FORGIVENESS The Department has published a regulation setting forth guidance for a program that would repay a portion of Stafford Loans made to eligible borrowers who teach full time or are employed as nurses full time in areas where there is a shortage of qualified professionals in those fields, or who volunteer for certain kinds of community service. According to the regulation, an eligible borrower is one who had no outstanding debt on an FFEL loan as of October 1, 1989. A borrower who is in default on an FFEL loan, and has not made satisfactory arrangements to repay it, is not eligible. [[Loan forgiveness program not yet funded]] To qualify for loan forgiveness, the borrower must teach in a teacher shortage area that meets the requirements for Federal Perkins Loan cancellation, and be teaching a subject for which there is a shortage of teachers, as defined by the state. The borrower must provide to the Department certification that he or she meets these requirements. For more information, borrowers should contact their lender or guarantor. As mentioned, the final regulation on loan forgiveness is now available; it was published June 16, 1994 and has an effective date of July 1, 1995. Please note that this program is not yet funded. If and when it does become funded, a FEDERAL REGISTER notice will be published to notify the public. REPAYMENT BY THE DEPARTMENT OF DEFENSE Currently, if a student borrower serves as an enlisted person in certain specialties in the U.S. Army, the Army Reserves, the Army National Guard, or the Air National Guard, the Department of Defense, as an enlistment incentive, will repay a portion of the loan. For more information the student should be directed to contact his or her local Army or Air National Guard recruiting office. This is a recruitment program and does not pertain to an individual's prior service. Loan repayment under this program is made directly to the lender, and is not considered financial aid. Such a repayment is considered as income to the student when calculating loan eligibility. DEFAULT [[Remind students to keep lenders informed]] Most borrowers repay their loans on time, but some do fall behind on their payments, for a variety of reasons. You should counsel students to maintain contact with the lender if they have repayment problems, to avoid delinquency and default. [[Late payment changes]] When a scheduled payment on a Stafford, SLS, or PLUS loan is not made on time, the loan becomes delinquent. The lender is required to make repeated attempts to reestablish payment, including attempts to contact the borrower by phone and letter, the use of skip- tracing assistance, and the use of the guarantor's preclaims assistance and supplemental preclaims assistance. If a borrower is late in making a payment, the lender may require the borrower to pay a late charge. The borrower may also be required to pay collection costs, such as attorney's fees and court costs, if payment of such costs is provided for in the borrower's promissory note. See the FFEL Program regulations, Section 682.410 and Section 682.411, for more detailed information on the loan collection efforts required of lenders. [[Default -- definition]] For loans that entered delinquency before April 7, 1986, default is defined as the failure to make payments when due if that failure continues for a period of 120 days in the case of a monthly repayment schedule, and 180 days for less frequent installments. For loans that entered delinquency on or after April 7, 1986, default is the failure to make payments when due if that failure continues for a period of 180 days for a loan repayable in monthly installments, and 240 days for a loan repayable in less frequent installments. [[Consequences of default]] If the borrower's delinquency persists, the lender may accelerate the loan, that is, demand the entire balance of the loan in one payment. The lender may file a default claim with the guaranty agency, which reviews the lender's collection efforts before reimbursement. If the guaranty agency pays the default claim, the agency will continue collection efforts. Before reporting the default to a credit bureau or assessing collection costs, the guaranty agency will provide the borrower with a written notice of its proposed actions, an opportunity to enter into a repayment agreement, and an opportunity for an administrative review of the status of the loan. Once a guaranty agency notifies a credit bureau of a borrower's default, the credit bureau may provide that information to inquirers for up to seven years from the date the loan is first reported as a default; for up to seven years from the date the guaranty agency pays the default claim; or for a borrower who enters repayment after default, and again allows the loan to default, up to seven years from the date the loan enters default the second time. Collection efforts may include garnishing up to 10 percent of the defaulter's disposable pay, withholding or "offsetting" part or all of a defaulter's federal or state income tax refund, and filing suit against the borrower. Descriptions of such enforcement procedures are provided in the April 29, 1994 FFELP Final Rule. [[Elimination of statute of limitations on student loan collections]] Concerning wage garnishment as an enforcement measure, each guaranty agency's procedures are subject to approval by the Department. Wage garnishment provisions are described in the Higher Education Amendments of 1992 under Section 488A. If the defaulter is sued, garnishing of wages may be included in the court's ruling. The Higher Education Technical Amendments of 1991 (P.L. 102-26) provided for continuation of garnishment, offset action, or a lawsuit regardless of any federal or state statutes of limitation that might otherwise have applied to such collection efforts. The Higher Education Amendments of 1992 made abolition of the statutes of limitation permanent, and applied the law to any pending cases and outstanding debts. [[Loans written off or compromised]] A student with a defaulted loan is no longer eligible for any federal student aid under the SFA programs. Even if a defaulted borrower's debt has been written off as uncollectible and closed out by reporting the principal amount to the Internal Revenue Service as taxable, the borrower is still considered to be in default, and ineligible for federal student aid. If a compromise agreement has been reached in which the borrower makes an agreement with the holder of the loan to settle the debt, the borrower may be eligible for additional federal student aid. If the borrower chooses to reaffirm his or her loan obligation and makes satisfactory arrangements to repay the debt, he or she may regain eligibility for SFA programs. [[SAR will note defaulted ED loans]] If a borrower is in default on an SFA loan held by the Department of Education or by a guaranty agency, and applies for federal student aid, the Student Aid Report (SAR) received after application will indicate that the borrower is in default and thus not eligible for aid under the SFA programs. If the borrower has made satisfactory arrangements to repay the loan, the SAR will indicate that the borrower is eligible, but will include a warning that if scheduled payments are not made on the loan, future federal student aid will be denied. Once the student allows a loan to go into default, his or her opportunity to obtain a deferment is lost, and he or she will not be able to receive any federal financial aid until the obligation is discharged, or satisfactory arrangements to repay the loan have been made with the lender or guarantor. A lender or guarantor, however, may grant forbearance to a borrower whose loan is delinquent or in default. If a loan obligation has been discharged in bankruptcy after the borrower has defaulted, it is no longer considered to be in default, and the borrower is eligible for further federal student aid. However, as noted under "Cancellation," the borrower must reaffirm the debt in order to be eligible for future FFEL Program loans. LOAN REHABILITATION There are some instances when a student or parent borrower who has defaulted on a guaranteed student loan or owes repayment on a grant may again borrow under SFA programs, if otherwise eligible. If the student or parent borrower has made satisfactory arrangements to repay the debt owed on a loan or grant, and provides the school with a statement to that effect from the appropriate guarantor in the case of a FFEL, or from the school owed in the case of a grant or Perkins Loan, the applicant would be eligible for a Stafford or PLUS loan. A Loan Rehabilitation Program is now available to borrowers who have defaulted on an FFEL and meet certain conditions. The Higher Education Amendments of 1992 require a guaranty agency to provide a loan rehabilitation program that will allow a defaulter the opportunity to make 12 "reasonable and affordable" consecutive monthly payments on a defaulted FFEL loan. The Department expects each guaranty agency to make a determination of what constitutes a reasonable and affordable payment amount on a case- by-case basis, after examining the borrower's financial information. A guaranty agency is required to document its determination of the appropriate payment amount only if the payment is less than $50.00. Each borrower must be provided with a written statement of the payment amount, and an opportunity to object to those terms. This guidance is published in an FFEL regulation published June 28, 1994. After the borrower makes 12 consecutive payments, the guaranty agency (or the Department, if the Department is holding the loan) will decide whether the borrower is a good candidate for rehabilitation and, if so, will try to sell the loan to a lender. A borrower who has been in repayment for more than 12 months at the time he or she requests rehabilitation is immediately eligible, if those payments were determined to be "reasonable and affordable". Payments secured from a borrower on an involuntary basis, through means such as wage garnishment, cannot be counted towards the borrower's required 12 consecutive monthly payments. Please note that once eligible, the debtor must continue to make payments while the loan transfer process is conducted by the guaranty agency. Therefore, because of the ways its loan cycle processing procedures are set up, it is possible that the borrower will send in more than 12 payments before the loan is rehabilitated. A borrower who wishes to rehabilitate a loan on which a judgement has been entered must sign a new promissory note prior to the sale of the loan to an eligible lender. Guaranty agencies must inform borrowers of the consequences of loan rehabilitation after 12 months. For example, a borrower's monthly payment amount will usually increase. Also, once the loan is rehabilitated, it is no longer in default and the borrower, if otherwise eligible, may again receive assistance from SFA programs, and will regain any remaining deferment benefits. The holder of the rehabilitated loan must notify promptly at least one credit bureau of the loan's rehabilitated status. The notification of credit bureaus is an important benefit to borrowers under this program. Students with questions about loan rehabilitation should be instructed to contact the agency holding their defaulted loan or loans. [[Reinstatement of SFA eligibilty through "satisfactory repayment arrangement]] The Higher Education Amendments of 1992 also provide for reinstatement of eligibility for all SFA programs for a borrower with a defaulted loan or loans, whether or not the loan has been repurchased, after the borrower has made six consecutive, voluntary, full monthly payments. This is known as a "satisfactory repayment arrangement". Please note, as explained on page 10-53 of Section Five ("Loan Refinancing and Consolidation"): for purposes of consolidating a defaulted loan, only three of these payments are required under a satisfactory repayment arrangement. This particular provision is effective July 1, 1995. Defaulted borrowers who have made six payments as described above must be informed by guaranty agencies of the possibility of loan rehabilitation (after six more payments are made by the borrower). A borrower may be given the opportunity to reinstate his or her defaulted loan only once. Note that reinstatement of eligibility does not bring the loan out of default, and the borrower is not eligible for deferment. Dear Colleague letter GEN-92-21 (October 1992) provides additional information about loan rehabilitation and loan reinstatement. In addition, the June 28, 1994 FFELP Final Rule sets forth guidance on these topics. PROGRAM DIFFERENCES The following differences between Stafford, unsubsidized Stafford, and PLUS loans should also be noted: FAMILY CONTRIBUTION A subsidized Stafford Loan applicant must have his or her expected family contribution (EFC) as determined by an approved need analysis system, plus other estimated student aid awarded, subtracted from the cost of attendance at his or her school. If the student's remaining need is less than the subsidized Stafford Loan maximum, the student's subsidized Stafford Loan cannot exceed that lesser amount. In contrast, income and EFC do not have to be considered when determining the amount of a PLUS or unsubsidized Stafford Loan, although other estimated student aid awarded is considered. As with all SFA programs, the PLUS or unsubsidized Stafford Loan, when added to other student aid, cannot exceed the cost of attendance. BEGINNING OF REPAYMENT PERIOD The repayment period for a Stafford Loan (subsidized or unsubsidized) begins on the day after the expiration of the six-month grace period, which begins when the borrower leaves school. The repayment period for a PLUS or Consolidation Loan begins on the day the loan is disbursed. In the SLS Program in place prior to July 1, 1994, the borrower has the option to delay repayment for a period consistent with the grace period in the Stafford Loan Program. The lender may capitalize interest during this period. DEFERMENT The chart and summary on the following pages provides deferment information on Stafford Loans (subsidized and unsubsidized), SLS, PLUS, and Consolidation Loans, and may be useful to students with previous loans. [[The chart and summary "Federal Family Education Loan Program Deferment Provisions" on page 10-71 to 10-73 is currently unavailable for viewing. Please reference your paper document for additional information.]] |