| AwardYear: 1998-1999 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 4 SectionTitle: Repayment PageNumbers: 43-54 GRACE PERIODS ----------------- A "grace period" is the period of time before the borrower must begin or resume repaying a loan. An "initial grace period" is one that immediately follows a period of enrollment and immediately precedes the date repayment is required to begin for the first time. For borrowers who have been attending at least half time, initial grace periods are six consecutive months after the borrower drops below half-time study at an eligible institution or at a comparable school outside the United States. The exception to this rule is a borrower with a Stafford Loan at the 7% interest rate. This borrower has a 9- to 12-month grace period, which is set by the lender or the guaranty agency and is shown on the promissory note the borrower signs. It is important to note that grace periods are always day-specific; that is, an initial grace period begins on the day immediately following the day the borrower ceases attending school at least half time and ends on the day before the repayment period begins. A borrower has ceased attending at least half time for the following reasons: because the student has completed the course of study, because the student has dropped out of school or has dropped below half-time status, or because the student transfers to a school that is not considered an eligible school for in-school deferment purposes (see Section 5 for more information). The borrower may request a shorter grace period. [[Correspondence courses and grace periods]] For correspondence students, the grace period begins on the earliest of the following three dates: - the date the borrower completes the program - the date that is 60 days after the school's deadline for completing the program - the date on which the borrower falls 60 days behind the due date for submitting a scheduled assignment. For information on eligible correspondence programs, see Chapter 3. For a student attending at least half time, the initial grace period does not end until he or she ceases to be enrolled at least half time for a continuous period of six months. A borrower who returns to school on at least a half-time basis prior to completion of the initial grace period is entitled to a full initial grace period, calculated as six consecutive months, from the date that he or she drops below half- time enrollment again. Suppose, for example, that a borrower takes out a loan in the fall quarter, drops out of school for the winter quarter, and resumes at least half-time study for the spring quarter. The borrower would still be entitled to a full initial grace period once he or she again leaves school or drops below half-time status. [[Borrower with SLS loan]] If a borrower has a Federal Supplemental Loans for Students (SLS) loan that has not yet entered repayment and a Federal Stafford Loan that has not yet entered repayment, the borrower may request that he or she be allowed to delay repayment on the SLS loan for the period equivalent to the Stafford Loan grace period so that repayment on both loans can begin at the same time. (Note that no new SLS loans are being made; the SLS Program was repealed beginning with the 1993-94 award year.) [[Post-deferment grace periods]] A borrower with Stafford Loans made prior to October 1, 1981 is entitled to a six-month post-deferment grace period following any deferment. The one exception is the unemployment deferment. Although a borrower may have several periods of unemployment deferred, he or she may receive a post-deferment grace period only following the first unemployment deferment. INTEREST RATES ----------------- Federal Stafford Loans In the past, the interest rate on a borrower's first Stafford Loan applied to all subsequent Stafford Loans, as long as he or she had an outstanding balance on a loan at that interest rate when subsequent loans were obtained. However, the Technical Amendments of 1993 changed the law to enable borrowers with fixed interest rates on earlier Stafford Loans to obtain the variable interest rate previously available only to new borrowers. Interest rates for Stafford Loans (subsidized and unsubsidized) follow: - For a loan disbursed on or after October 1, 1992 and before July 1, 1994 to a borrower with no FFELs (either subsidized or unsubsidized) outstanding, the interest rate is variable and is determined on June 1 of each year. - The rate will be based on the bond equivalent rate of 91-day Treasury bills auctioned at the final auction before June 1 plus 3.1%. - The interest rate for these loans may not exceed 9%. - For loans first disbursed on or after July 1, 1994, the interest rate is variable and is determined on June 1 of each year, regardless of whether that borrower has FFELs outstanding. - The rate will be based on the bond equivalent rate of 91-day Treasury bills auctioned at the final auction before June 1 plus 3.1% (except during in-school, grace, and deferment periods for loans that are first disbursed on or after July 1, 1995 but prior to July 1, 1998). - The interest rate for these loans may not exceed 8.25%. For example, a borrower who has outstanding Stafford Loans with interest rates of 9% or 7% and whose newest Stafford Loan is disbursed on September 1, 1998 will receive a variable interest rate on that loan. The terms and conditions (and interest rates) of the prior loans will still apply to those prior loans unless the loans are converted to a variable interest rate because they are subject to rebates of excess interest (see next page). The variable interest rate for July 1, 1997 through June 30, 1998 for the first category of loans (loans disbursed on or after October 1, 1992 and before July 1, 1994) is 8.26%. The variable interest rate for July 1, 1997 through June 30, 1998 for the second category of loans (loans first disbursed on or after July 1, 1995 but prior to July 1, 1998) is 8.25%. As stated, during in-school, grace, and deferment periods for loans that are first disbursed on or after July 1, 1995 but prior to July 1, 1998, the interest rate is not the same as it is during repayment. Instead of being based on the bond equivalent rate of 91-day Treasury bills auctioned at the final auction before June 1 plus 3.1%, the rate is based on the bond equivalent rate of 91-day Treasury bills auctioned at the final auction before June 1 plus 2.5%. For this category of loans, the interest rate for July 1, 1997 through June 30, 1998 is 7.66%. If an annual adjustment in a borrower's variable interest rate will prevent the loan from being repaid within the maximum allowable repayment period under the current repayment schedule, a lender must either make an adjustment in the borrower's monthly payment amount or grant a mandatory administrative forbearance as described in Section 5 of this chapter. Conversion of Loans to a Variable Interest Rate Certain fixed-rate loans disbursed in the past are also now subject to conversion to a variable interest rate. The Technical Amendments of 1993 required lenders to convert most loans subject to rebate of excess interest to variable rate loans by January 1, 1995. The variable rate depended on the type of loan converted but could not exceed the original fixed interest rate of the loan as specified in the promissory note. The loan holder was required to inform the borrower of the conversion to a variable rate at least 30 days prior to conversion. Loans subject to a rebate of excess interest and conversion to a variable rate are - Stafford Loans at 8% changing to 10% after four years of repayment - If made before July 23, 1992, such a loan becomes subject to a rebate only when the interest rate increases to 10% - If made to a first-time borrower on or after July 23, 1992 and before October 1, 1992, such a loan becomes subject to a rebate only when the interest rate increases to 10% - If made to a repeat borrower on or after July 23, 1992 and before July 1, 1994, such a loan is subject to a rebate on the date the loan is made; - 7%, 8%, and 9% fixed-rate Stafford Loans made to repeat borrowers on or after July 23, 1992 and before July 1, 1994. Loans subject to rebate of excess interest are explained in more detail in the November 30, 1994 FFEL Final Rule. Federal PLUS Loans All Federal PLUS Loans made on or after July 1, 1987 have variable interest rates, determined on June 1 of each year according to a prescribed formula and is effective for the following July 1 through June 30. The variable interest rate for a PLUS Loan first disbursed on or after July 1, 1987 and before October 1, 1992 must not exceed 12%. The interest rate for these PLUS loans for July 1, 1997 through June 30, 1998 is 9.13%. The variable interest rate for a PLUS Loan first disbursed on or after October 1, 1992 and before July 1, 1994 may not exceed 10%. The interest rate for these PLUS Loans for July 1, 1997 through June 30, 1998 is 8.98%. The variable interest rate for a PLUS Loan disbursed on or after July 1, 1994 and before July 1, 1998 must not exceed 9%. The bond equivalent rate of the 52-week Treasury Bills (auctioned at the final auction held prior to June 1 each year), plus 3.1% of that amount, equals the variable interest rate. The variable interest rate for these PLUS Loans for July 1, 1997 through June 30, 1998 is 8.98%. Annual adjustments in interest rates may alter monthly payment amounts from year to year. Or, the lender may keep the monthly payment amount the same but increase (or decrease) the number of payments required to reflect the increase (or decrease) in the annual variable interest rate. ADDITIONAL COSTS OF BORROWING --------------------------------- Loan Fees In addition to interest, FFEL borrowers also pay insurance premiums and origination fees on their loans. A lender charges each FFEL borrower an origination fee. A guaranty agency charges the lender an insurance premium on each loan it guarantees. Generally, the lender passes this cost on to the borrower. The maximum insurance premium that a guaranty agency may charge the lender of a Stafford Loan or PLUS Loan is a one-time fee not to exceed 1% of the principal amount of the loan. If the lender passes this charge on to the borrower, the fee must be deducted proportionately from each loan disbursement. The origination fee is 3% of the principal amount of the loan. A lender may (but is not required to) charge an origination fee on a subsidized Stafford Loan. A lender must charge an origination fee on an unsubsidized Stafford Loan or a PLUS Loan. The lender must deduct (collect) the origination fee proportionately from each disbursement, regardless of the type of loan on which it is being charged. [[Proration of fees]] The origination fee and insurance premium, or appropriate prorated amounts of those fees, must be refunded by application to the borrower's account if - the school returns the loan or a portion of the loan to the lender, - the loan check has not been negotiated within 120 days of disbursement, - the loan is repaid in full within 120 days of disbursement, or - the loan proceeds were disbursed by electronic funds transfer (EFT) or by master check and the school has not released these funds from its restricted account within 120 days of disbursement. Late Charges If a borrower fails to pay all or a portion of a required installment within 15 days after it is due, the lender may require the borrower to pay a late charge (if authorized by the borrower's promissory note). This charge may not exceed six cents for each dollar of each late installment. Collection Charges If authorized by the borrower's promissory note, and notwithstanding any provisions of state law, a lender may require that a borrower or an endorser pay costs the lender or its agents incurred in collecting installments not paid when due. These charges, include but are not limited to - attorney's fees, - court costs, and - telegrams. These costs may not include routine collection costs associated with preparing letters or notices or with making personal contacts with the borrower (for example, local and long-distance telephone calls). REPAYMENT OF FEDERAL STAFFORD LOANS ---------------------------------------- While the borrower is in school at least half time (before the expiration of his or her grace period), the federal government pays the interest on a subsidized Stafford Loan on the his or her behalf. For an unsubsidized Stafford Loan, interest accrues during this period, and the borrower is responsible for paying it. The borrower may pay the interest while he or she is in school, or the lender will capitalize it (that is, add it to the principal balance). [[Maximum repayment period]] The loan repayment period for a Stafford Loan (subsidized or unsubsidized) begins the day after the grace period ends and ends no later than 10 years from that date (excluding periods of deferment and forbearance). Generally, the first payment on a Stafford Loan is due no later than 45 days after the first day that repayment begins. The lender must notify the borrower of the date and amount of the first payment as part of a repayment disclosure that must be sent to the borrower no less than 30 days before the date that the first payment is due and no more than 240 days before that date. Determining a Student's Withdrawal Date The student's withdrawal date is the date that the student notifies an institution of his or her withdrawal or the date of withdrawal specified by the student, whichever is later. If the student does not withdraw officially (that is, he or she drops out of school without notifying the school), the last recorded date of the student's class attendance, as documented by the school, is the student's withdrawal date. An institution must determine the withdrawal of a student who drops out in a timely manner. This date must be determined within 30 days after the expiration of the earliest of these three periods: 1) the period of enrollment for which the student has been charged; 2) the academic year in which the student withdrew 3) the educational program in which the student withdrew In the case of a student who does not return from a summer break, the school shall determine the student's withdrawal date no later than 30 days after the first day of the next scheduled term. [[Leave of absence]] A student who has been granted a leave of absence is not considered to have withdrawn from school. If a student fails to return from an approved leave of absence (whether approved or unapproved), the withdrawal date is the last recorded date of class attendance. This date is used regardless of whether the student withdraws officially (by notifying the school) or unofficially (by discontinuing attendance without notifying the school). [[Correspondence course/withdrawal date]] For correspondence study, the withdrawal date is the date of the last lesson the student submitted. For appeal procedures with regard to the withdrawal date for correspondence study, see 34 CFR 668.22(j)(1)(iii). The refund policy for students who have withdrawn, who have dropped out, or who have not returned from an approved or unapproved leave of absence is explained in Section 11. It is the student's responsibility to notify the lender of the date on which he or she ceases to be enrolled at a participating school at least half time. The financial aid administrator should emphasize to students the importance of that responsibility. Upon receiving notification of this critical date, the lender will send a repayment schedule to the borrower. If a loan sale or transfer requires the borrower to send payments to a new address, the present and former holders of the loan (either jointly or separately) must notify the borrower of the change within 45 days of the sale or transfer. This notification should spell out the borrower's obligations to the new loan holder. Loan Repayment Schedules Provisions of a loan repayment schedule must agree with those in the promissory note and the loan disclosure statement. Generally, a borrower has from 5 to 10 years to repay a loan in full. Any periods of authorized deferment or forbearance are not counted in the repayment period. [[Prepayment]] A borrower may prepay all or part of a loan at any time without penalty. A lender has the option of crediting the payments first to late charges or collection costs, then to outstanding interest, and then to unpaid principal. If the borrower submits a payment amount that exceeds the normal monthly payment amount and does not provide instructions for handling the excess payment amount and the excess amount is equal to or greater than a full monthly payment, the lender must apply the excess to future installments, advancing the next payment due date. If the excess amount is less than a full monthly payment amount, the lender must apply it as a prepayment of principal. [[Minimum payment amount]] In general, the minimum total scheduled payments to all holders of a borrower's FFELs must be at least $600 per year. Loan payments for Stafford Loans, however, usually exceed these minimums because of the 10-year statutory limit on repayment. Monthly payment amounts may not be set at less than the amount of interest due. The lender may round up the loan payment to ensure that the payment is a multiple of $5. The lender may require a repayment period of less than 5 years, if necessary, to ensure that the above minimum payments are met. Note that the $600-per-year minimum combined annual payment for a married couple with Stafford Loans is no longer permitted. Repayment Plans Lenders are required to offer the option of standard, graduated, or income-sensitive repayment to new Stafford or SLS borrowers. A new borrower is defined as someone who borrows on or after July 1, 1993 and who, at the time he or she borrows, has no outstanding balance on a FFEL borrowed before that date. The Secretary encourages lenders to offer this flexible range of repayment options to all other borrowers. A lender must provide the choice of repayment plans to a borrower not earlier than six months before the date of the first scheduled loan payment. Even if a borrower does not choose a particular plan, the lender and borrower may agree (to the extent practicable) that the borrower will repay all of his or her FFELs under one repayment schedule. A lender may agree to a standard, graduated, or income-sensitive repayment schedule for a new Stafford or SLS borrower, as long as the minimum annual payment and maximum time period requirements are met and as long as scheduled monthly payments cover at least the monthly interest charges. A borrower must respond to a lender's offer of a choice of repayment options within 45 days after the lender makes the offer, or he or she will be required to repay under a standard repayment schedule. [[Standard repayment]] The standard repayment plan has a fixed monthly payment amount. This amount may vary annually if an adjustment in a borrower's variable interest rate necessitates a change in his or her repayment schedule. [[Graduated repayment]] The graduated plan has a varying monthly payment amount. This amount increases incrementally during the repayment period. If a graduated repayment schedule is established, however, no single payment can be scheduled to be more than three times greater than any other scheduled payment. [[Income-sensitive repayment]] Under an income-sensitive repayment schedule, the amount of a borrower's installment payment is adjusted annually, based on the borrower's expected total monthly gross income. In general, the lender will request from the borrower information on his or her income no earlier than 90 days before the due date of the borrower's first payment. The income information must be sufficient for the lender to make a reasonable determination of what the borrower's payment amount should be. If a lender receives late notification that a borrower has dropped below half-time enrollment status at a school, the lender may request the income information earlier. If a borrower reports income that a lender considers to be insufficient to establish monthly payments that would repay a loan within the maximum 10-year repayment period, the lender shall require the borrower to submit evidence showing the amount of the most recent total monthly gross income he or she has received from employment and from other sources. A lender must grant forbearance to a borrower for a period of up to five years of payments if the income-sensitive monthly payment amount would prevent the borrower from repaying the loan within the maximum repayment period. If a borrower chooses the income-sensitive plan but then does not provide any documentation that may be required for repayment under that plan, the lender may require that borrower to repay his or her loans under the standard repayment option. REPAYMENT OF FEDERAL PLUS LOANS ------------------------------------ There is no interest subsidy for PLUS Loan borrowers; the borrower is responsible for all interest that accrues on the loan while the student is in school and during periods of authorized deferment and forbearance. The repayment period for a PLUS Loan begins on the date the last disbursement is made. The repayment period for a PLUS Loan ends no later than 10 years after repayment begins, excluding periods of authorized deferment and forbearance. A PLUS Loan borrower's first payment of principal and interest is due within 60 days after the loan is fully disbursed, unless a deferment conditions applies. See the following section on deferments for more information. [[PLUS Loan minimum payment amount]] As stated in the discussion of Stafford Loans, the minimum total scheduled payments to all holders of a borrower's FFELs must be at least $600 per year. This minimum also applies to PLUS Loans. A borrower must pay a total of at least $600 per year on all of his or her PLUS Loans. If the borrower also received FFELs as a student, he or she must pay a total of at least $600 per year on all of his or her PLUS Loans and student FFELs combined. Monthly payment amounts may not be set at less than the amount of interest due. The lender may round up the loan payment to ensure that the payment is a multiple of $5. The lender may require a repayment period of less than 5 years, if necessary, to ensure that the above minimum payments are met. [[Prepayment]] There is no prepayment penalty for PLUS Loans. A lender may agree to a standard, graduated, or an income-sensitive repayment schedule for a PLUS Loan borrower, as long as minimum annual payment and maximum time periods for loan repayment are met. The Department encourages lenders to provide borrowers flexible repayment schedules as long as payments at least cover interest charges. If, after a parent obtains a PLUS Loan, the student for whom the parent borrowed enrolls less than half time or does not enroll at all during the period for which the loan was intended, the entire amount is immediately due to the lender. It is the parent's responsibility to notify the lender of the date on which his or her child (for whom the parent has taken out a PLUS Loan) ceases to be enrolled at a participating school at least half time. The school also must promptly inform the lender when the student for whom the parent borrowed drops below half-time status. CAPITALIZATION OF INTEREST ------------------------------ Capitalization is the addition of accrued interest to a borrower's loan principal. The 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 no more frequently than quarterly and any time repayment begins or resumes. Generally interest is capitalized when a borrower elects not to pay it (or fails to pay it) during forbearance or during in-school, grace, and deferment periods on unsubsidized Stafford Loans and PLUS Loans. (On subsidized Stafford Loans, interest is paid by the federal government during the last three periods mentioned.) If a borrower has agreed to pay interest during a deferment or forbearance period or during an in-school or grace period but fails to resolve a payment delinquency, 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. The borrower should understand that capitalization of interest increases the principal balance of the loan. REPAYMENT DISCLOSURE STATEMENT AND BILLING ------------------------------------------------ A lender must provide a Stafford Loan borrower with a repayment disclosure statement not less than 30 or more than 240 days before the borrower's first payment is due. In addition, the lender or holder of the loan must notify the borrower--not later than 120 days after the borrower has left school--of the date repayment begins. The repayment disclosure statement must provide the borrower the following information: - the name and address of the lender and the address to which communications and payments should be sent; - the estimated balance owed by the borrower on the loans covered by the disclosure statement as of the date on which repayment is due to begin (including capitalized interest, if applicable); - the stated interest rate on the loan or loans, or the combined interest rate of loans with different rates; - the amount of the loan, the insurance premium, the loan origination fee, and any other charges, and how they are to be paid; - the repayment schedule, including when repayment will begin (due date of first payment), when accrued interest must be paid, and the number, amount, and frequency of required repayments; - refinancing and consolidation options; - for subsidized Stafford Loans, the projected total of interest charges the borrower will pay, if payments are made according to the repayment schedule; for unsubsidized Stafford Loans and PLUS loans, sample projections of monthly payments at various interest rates and with interest capitalization; and - a statement explaining the borrower's right to make prepayments. [[Lender treatment of several loans of same type]] Lenders shall treat all of a borrower's loans of the same type as one loan for billing and deferment purposes. A borrower with several Stafford Loans held by a single lender would, therefore, receive one billing notice for all of his or her loans; any deferment received for one of the loans would apply 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 loan holder, and one loan servicer, in order to reduce the number of agencies contacting the borrower. These efforts to simplify loan repayment are to be made with the cooperation of the borrower. |