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(Direct Loans) Subject: Direct Loan Processing Information - Making Disbursement Adjustments and Reducing Direct Loan Awards to Zero

Posted Date:November 9, 2010

Author: William Leith, Service Director, Program Management, Federal Student Aid

Subject: Direct Loan Processing Information - Making Disbursement Adjustments and Reducing Direct Loan Awards to Zero

In this announcement, we provide guidance on the following two processes: making disbursement adjustments to William D. Ford Federal Direct Loan (Direct Loan) awards and reducing Direct Loan awards to zero (which effectively means that the Direct Loan is cancelled/inactivated). Disbursement adjustments are made or loans are reduced because –

  • The borrower returned the money and requested all or a portion of the loan be cancelled within the regulatory timeframes.
  • The school cancelled all or a portion of the loan to comply with statutory or regulatory requirements.
  • The school is correcting reporting errors.

Notes:

  1. Throughout this announcement, we are assuming that an adjustment is being made to an actual disbursement, meaning it has been submitted and accepted by the Common Origination and Disbursement (COD) System with a Disbursement Release Indictor (DRI) set to “True.”
  2. Disbursement adjustments or loan reductions should be reported to the COD System within 30 days of the action prompting the change.

Making Disbursement Adjustments

In an attachment to this announcement, we provide more detailed information and several examples of making disbursement adjustments. Note: The examples illustrate how a change may impact the disbursement date and its impact on the interest calculation. The process by which schools accomplish the disbursement adjustment will vary due to differences in school software products.

Some key points to remember are the following:

  • Downward adjustments are used to cancel all or a portion of a loan.
  • Downward and upward adjustments are used to correct the amount of money reported for a particular disbursement.
  • An upward disbursement adjustment is not the same as a new disbursement.
  • The order of processing must be considered:
    • For downward adjustments, the disbursement adjustments must be submitted and accepted before the loan amount can be adjusted.
    • For upward adjustments, the loan amount must be increased before the disbursements can be adjusted.
  • The accuracy of the disbursement date is critical, since this determines the date on which interest begins to be charged. The disbursement date must be reported as the date the funds were disbursed to the borrower by posting funds to the student’s account at the school or paying the borrower directly (via check or other means.) The disbursement date should only be changed when the originally reported disbursement date is incorrect.
  • An adjustment to an actual disbursement amount is treated as if it occurred on the date of the original disbursement. The date the disbursement adjustment is made is not reported to the COD System.
  • Do not increase the loan amount by making an adjustment to a prior actual disbursement. If you process a loan amount increase by making an upward adjustment to a prior disbursement, the interest on the increased amount will be calculated from the date of the prior disbursement rather than from the actual (later) date the borrower received the additional funds.

Reducing a Direct Loan to Zero (Cancelling/Inactivating)

In the Direct Loan Program, loans are cancelled/inactivated by reducing the loan to $0. Note: When reducing a loan that has accepted actual disbursements, the disbursements must first be reduced to $0 (and accepted and processed by the COD System) before the loan amount can be reduced to $0.

If necessary, the school can “reactivate” the loan by submitting a new loan amount and disbursement dates and amounts.

Treatment of Loan Funds after a Downward Adjustment or Loan Reduction

As described above, when all or a portion of a loan is cancelled (either because the borrower requested the cancellation within the regulatory timeframes or the school did so to comply with statutory or regulatory requirements), the school must make the appropriate adjustment and report it to the COD System. The school also needs to take a corresponding action with the loan funds that are being cancelled.

Direct Loan funds are not student-specific, but are program year-specific. This means that when all or a portion of a loan for one student is cancelled, the cancelled loan funds can be disbursed to another eligible student who is receiving a loan for that same Direct Loan program year. If the funds cannot be disbursed within the regulatory timeframes, they must be returned to the Department of Education via G5.

We provided guidance on how to make Direct Loan refunds of cash (returning unused Direct Loan funds) in a July 23, 2010 Electronic Announcement posted on the Information for Financial Aid Professionals (IFAP) Web site. Note for Foreign Schools: Guidance about returning Direct Loan funds is posted in the Direct Loan Processing section of the Foreign School Information Page. Additional guidance about returning money will be provided in a forthcoming Foreign School Update.

Note: Schools must not return Direct Loan funds to the federal servicers. For guidance about returning non-Direct Loan funds (for example, for a FFEL Purchased Loan) schools should refer to an October 19, 2010 Electronic Announcement posted on the IFAP Web site.

Contact Information

Additional information about disbursement processing can be found in the Implementation Guide (Volume II, Section 1) of the 2010-2011 COD Technical Reference.

If you have questions about disbursement processing, contact the COD School Relations Center at 800/848-0978. You may also e-mail CODSupport@acs-inc.com.

Last Modified: 11/08/2010