Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Perkins Loan Program - Due Diligence - Billing and Address Searches

AwardYear: 1997-1998
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 6
SectionTitle: Due Diligence - Billing and Address Searches
PageNumbers: 67-75


Due diligence is the steps schools must take to collect Federal
Perkins Loans and National Direct Student Loans (NDSLs). These
steps include, but are not limited to, billing the borrower, sending
overdue notices when necessary, and conducting address searches if
the borrower cannot be located. If billing procedures fail to get the
borrower into repayment, schools must proceed to the second--and
more intensive--stage of collection. This stage may include hiring a
collection firm. In many cases, schools may have to litigate.

Due diligence comprises all these procedures, but it can also be as
basic as keeping the borrower informed of all program changes that
affect his or her rights and responsibilities and responding promptly
to the borrower's inquiries.

[[Keep borrower information current]]
Keeping current information on a borrower makes it easier for the
school to know when repayment must begin and where to send
billing notices. The various offices at the school--the admissions,
business, alumni, placement, financial aid, and registrar's offices, and
others, as necessary--must provide the information they have
available about the borrower to those offices responsible for billing
and collecting loans to assist them in determining the following
information about the borrower:

- enrollment status;

- expected graduation or termination date;

- the date the borrower officially withdraws, drops below half-time
enrollment, or is expelled; and

- current name, address, telephone number, Social Security
Number, and driver's license number (if any).

EXIT INTERVIEW

Contact with the borrower becomes even more important just before
he or she leaves school, when the school must hold an exit interview
to explain the borrower's responsibility for repaying the loan and to
state when the first payment will be due and whether payments are to
be made monthly, bimonthly, or quarterly. If individual interviews
are not possible, group interviews are acceptable. The school must
document its exit interviews.

[[School must provide certain information]]
During the interview, a borrower must be informed of the terms of
the loan, the amount of the outstanding balance, and his or her
obligation to repay according to the repayment schedule. The school
must also make the borrower aware of the consequences of default,
including the possibility that his or her account may be referred to a
collection firm, that the default will be reported to a national credit
bureau, and that legal action may be taken to collect the amount
owed.

[[Borrower rights and responsibilities]]
A borrower must also be told his or her rights and responsibilities
including

- his or her responsibility to inform the school immediately of any
change in name, address, telephone number, Social Security
Number, or driver's licence number;

- his or her rights to forbearance, deferment, cancellation, or
postponement of repayment and the procedures for filing for those
benefits;*1* and

- his or her responsibility to contact the school before the due date
of any payment he or she cannot make.

[[Additional information school must provide to borrower]]
The school must provide the following additional information during
the exit interview by including it either in the borrower's promissory
note or in some other written statement the school gives the
borrower. A school that is unaware that a borrower has left school
must attempt to provide the required information to the borrower in
writing upon learning that the borrower has left:

- the name and address of the school to which the debt is owed and
the name and address of the official or servicing agent where
communications should be sent;

- the name and address of the party where payments should be sent;

- the estimated amount the borrower owes on the date the
repayment period is scheduled to begin and the amount of the total
debt (principal and interest);

- the interest rate and the projected total interest charges the
borrower will pay;

- a discussion of the repayment schedule including the date the first
installment is due, and the number, amount, and frequency of
required payments;

- any special options for loan consolidation or other refinancing;

- a statement that the borrower may prepay all or part of the loan
without penalty;

- a discussion of any fees that will be charged the borrower for not
making payments on time;

- a description of any charges associated with default, such as
liability for loan collection costs reasonably incurred by the school
or the Department; and

- information about the borrower's rights to forbearance, deferment,
cancellation or postponement of repayment and the procedures for
filing for those benefits.

A school is no longer required to give borrowers information about
the average indebtedness of students with Perkins Loans at that
school.

[[Collecting information during the exit interview]]
The school must require the borrower to provide the following
information during the exit interview, which the school must keep in
its records:

- the borrower's expected permanent address after leaving school
(regardless of the reason for leaving);

- the name and address of the borrower's expected employer after
leaving school;

- the borrower's driver's license number;

- the address of the borrower's next of kin; and

- any corrections in the school's records relating to the borrower's
name, address, Social Security Number, personal references, and
driver's license number.

At the time of the exit interview, the borrower must sign the
repayment schedule, and the school must give the borrower copies of
the signed schedule and the signed promissory note. As previously
noted, the school must keep the original signed promissory note and
repayment schedule in a locked, fireproof container until the loan is
repaid or until the originals are needed to enforce collection of the
loan. If the originals are released for enforcement purposes, the
school must keep certified true copies of the documents released.

[[Mailing exit interview materials]]
If the school discovers that a borrower has left without having had an
exit interview, the school must either contact the borrower and
personally give him or her the information listed on the previous
pages or mail this information. The school must also provide the
borrower a copy of the signed promissory note and two copies of the
repayment schedule, one of which the borrower must sign and return
to the school.

CONTACT DURING GRACE PERIODS

[[Three contacts in nine-month grace period]]
[[Two contacts in six-month grace period]]
The school must contact the borrower during both initial and post-
deferment grace periods to remind him or her when repayment will
begin or resume. For a loan with a nine-month initial grace period,
the school must contact the borrower three times during the grace
period. For a loan with a six-month initial grace period, the school
must contact the borrower twice during that period. Most loans also
have POST-DEFERMENT grace periods of six months. For such a loan,
the school must also contact the borrower twice during any post-
deferment grace period. The chart below shows the length of initial
and post-deferment grace periods for NDSLs and Perkins Loans.

[[The chart "Grace Periods (Borrowers Attending at Least Half
Time)" on page 6-70 is currently unavailable for viewing. Please reference
your paper document for additional information.]]

The FIRST CONTACT must be 90 DAYS after any grace period
(initial or post-deferment) begins. The school must remind the
borrower of the responsibility to repay the loan and must send the
borrower information about the total amount to be repaid (or
remaining to be paid, if a payment has been made in the past). This
information must include the amount of principal and interest over
the remaining life of the loan and the due date and amount of the first
payment (or next payment, if a payment has been made previously).

The SECOND CONTACT must be 150 DAYS after any grace
period begins, when the school must again remind the borrower of
the due date and amount of the first (or next) payment. The second
contact is timed to coincide with the first billing notice for a loan
with a six-month grace period (30 days before the first payment is
due). These two notices may be combined.

For a borrower with a NINE-MONTH initial grace period, the school
must make a THIRD CONTACT 240 DAYS after the grace period
begins to remind the borrower of the date and amount of the first
payment. Like the second contact for a loan with a six-month grace
period, this 240-day contact is timed to coincide with the first billing
notice. Again, the school may combine the two notices. (Refer to the
chart below.)

[[The "Contact with Borrower During Grace Period" timeline on
page 6-71 is currently unavailable for viewing. Please reference your
paper document for additional information.]]

BILLING PROCEDURES

Billing refers to that series of actions the school routinely performs
to notify borrowers of payments due, remind them of overdue
payments, and demand payment of overdue amounts.

The school may choose a coupon payment system as its method of
billing. If so, the school must send the coupons to the borrower at
least 30 days before the first payment is due. If the school does not
use a coupon system, it must, at least 30 DAYS before the first
payment is due, send the borrower a statement of account and a
written notice giving the name and address of the party to which
payments should be sent. The statement of account includes
information such as the total amount borrowed, the interest rate on
the loan, and the amount of the monthly payment. For subsequent
payments, the school must send the borrower a statement of account
at least 15 DAYS before the due date of the payment.*2*

[[First overdue notice]]
If a payment is overdue and the school has not received a request for
forbearance, deferment, postponement, or cancellation, the school
must send the borrower an OVERDUE NOTICE within 15 DAYS
after the due date.

[[Late charge required]]
For loans made for periods of enrollment beginning on or after

January 1, 1986, schools are required to impose a late charge when
the borrower's payment becomes overdue.*3* The charge is based
either on the actual costs the school incurs in taking steps to obtain
the overdue amount or on average costs incurred in similar attempts
with other borrowers. The charge may not exceed 20% of the
installment payment most recently due.

The school must also impose a late charge if the borrower's payment
is overdue and the borrower has not filed a complete request for
forbearance, deferment, cancellation, or postponement on time.*3*
To be considered complete, the request must contain enough
information for the school to determine whether the borrower is
entitled to the relief requested.

Late charges on loans made for periods of enrollment that began on
or after January 1, 1986 may be assessed only during the billing
process; they may not be imposed once the school begins collection
procedures. For a borrower who repays the full amount of past-due
payments, the school may waive any late charges that were imposed.

[[Optional penalty charge before 1/1/86]]
Schools are authorized but not required to assess a penalty charge for
an overdue payment on a loan made for a period of enrollment that
began before January 1, 1986. The maximum penalty charge that
may be assessed on a loan payable monthly is $1 for the first month
and $2 for each additional month a payment is overdue; the
maximum penalty for a loan payable bimonthly is $3; the maximum
penalty for loans payable quarterly is $6. Penalty charges on these
loans may be assessed only during the billing process.

The school may either add the penalty or late charge to the principal
amount of the loan as of the first day the payment was due or may
include the charge with the next payment that is scheduled after the
date it notifies the borrower that the charge must be paid in full by
the next payment due date. Schools may wish to use the first overdue
notice to inform the borrower of the late charge.

[[Second notice]]
If the borrower does not satisfactorily respond to the first overdue
notice, the school must continue to contact him or her. A SECOND
OVERDUE NOTICE must be sent within 30 DAYS after the first. If
there is still no response, a FINAL DEMAND LETTER must be sent
within 15 DAYS after the second notice. The letter may be (but does
not have to be) sent by certified mail. The final demand letter must
inform the borrower that unless the school receives a payment or a
request for forbearance, deferment, postponement, or cancellation
WITHIN 30 DAYS of the date of the letter, the school will refer the
account for collection*4* or litigation and will report the default to a
credit bureau as required by law.

[[Final demand]]
The school may skip the first two letters and send just the final
demand letter within 15 DAYS after the payment is overdue if the
borrower's repayment history has been unsatisfactory or if the school
can reasonably conclude the borrower does not intend to repay or to
seek forbearance, deferment, postponement, or cancellation. A
borrower is considered to have an unsatisfactory repayment history if
he or she has previously failed to make payments when due, has
previously failed to request deferment, forbearance, postponement,
or cancellation on time, or has previously received a final demand
letter.

[[The "Billing Procedures" timeline on page 6-73 is currently
unavailable for viewing. Please reference your paper document
for additional information.]]

[[Telephone contact]]
If the borrower does not respond to the final demand letter within 30
days, the school must try to contact him or her by telephone before
beginning collection procedures. As telephone contact is often very
effective in getting the borrower to begin repayment, the school may
be able to avoid the more costly procedures of collection.

If the school calls a number and there is no answer, the school should
make at least one other attempt to reach the borrower on a different
day and at a different time. If the borrower has an unlisted telephone
number, the school must make reasonable attempts to obtain it by
contacting sources such as the borrower's employer or parents. If the
school is still unsuccessful, it should document that fact in its files.

If the borrower does not respond satisfactorily to the final demand
letter, the school must try and recover the amount owed from the
borrower. For loans made prior to July 23, 1992, the school must
also try to collect the amount owed from any endorser of the loan. In
an effort to recover the loan from one party or the other, a school
often sends the endorser a copy of the final demand letter that was
sent to the borrower and copies of all future communications about
the borrower's debt, including dunning letters. For loans made on or
after July 23, 1992, an endorser is no longer required.

[[Acceleration]]
The school may choose to accelerate a loan if the borrower misses a
payment or does not file for deferment, forbearance, postponement,
or cancellation on time. Acceleration means making payable
immediately the entire outstanding balance including interest and any
applicable late charges or collection fees. Because this marks a
serious stage of default, the borrower should have one last chance to
bring his or her account current. For that reason, if the school plans
to accelerate the loan, it must send the borrower written acceleration
notice at least 30 days in advance. The notice may be included in the
final demand letter or in some other written notice sent to the
borrower. If the loan is accelerated, the school must subsequently
send the borrower a second notice to inform him or her of the date
the loan was accelerated and the total amount due. Remember that
acceleration is an option, not a requirement. However, if a school
plans to assign the loan to the Department for collection, the school
must first accelerate the loan. Once a loan has been accelerated, the
borrower loses all rights to deferment and cancellation benefits for
qualifying service performed after the date of acceleration.

ADDRESS SEARCHES

The school must take the following steps to locate the borrower if
communications are returned undelivered (other than unclaimed
mail):

- review the records of all appropriate institutional offices and

- review telephone directories or check with information operators
in the area of the borrower's last known address.

If these methods are unsuccessful, the school must either use its own
personnel to try to locate the borrower (employing and documenting
efforts comparable to commercial skip-tracing services), or must use
a commercial skip-trace firm. The school may elect to use the
Internal Revenue Service skip-tracing service provided through the
Department, discussed below.

If the school still cannot locate the borrower after taking these steps,
it must continue to make reasonable attempts at least twice a year
until

- the loan is recovered through litigation;

- the account is assigned to the Department; or

- the account is written off. (See Section 7.)

[[IRS/ED skip-tracing service]]
To help locate a borrower whose collection notices are returned
undelivered, a school may participate in the IRS/ED skip-tracing
service. The Higher Education Amendments of 1992 eliminated the
REQUIREMENT that schools use the IRS/ED skip-tracing service in
carrying out the provisions of due diligence. However, the
Department strongly encourages schools to continue to use this
service. The IRS/ED skip-tracing service is one of the most powerful
tools available to schools for locating defaulted borrowers. The
Department will continue to send schools that participate in the
Perkins Loan Program periodic "Dear Colleague" letters that give
instructions for completing the report. "Dear Colleague" Letter CB-
96-15 (LD), dated July 1996, included instructions for completing
the Report that was due by August 31, 1996.

[[Filing a Safeguard Activity Report to use IRS/ED skip tracing]]
In order to maintain eligibility to participate in the IRS/ED skip-
tracing service, each participating school must submit an annual
Safeguard Activity Report, in accordance with the IRS publication
1075. If a school fails to submit the Report, it will lose its eligibility
to participate in the service. The reports help ensure that procedures
are established and utilized to safeguard the names and addresses of
defaulted borrowers under the Perkins Loan Program. General
questions should be directed to the Department's Program Systems
Service, Campus-Based Programs Systems Division. The telephone
number is (202) 708-6726.


*1* See Sections 4 and 5 of this chapter for more information

*2* If the borrower elects to make payments by means of an
electronic transfer of funds from the borrower's bank account, the
school is not required to send the borrower a statement of account at
least 15 days before the due date of each subsequent payment.
However, the school must send the borrower an annual statement of
account.

*3* The mandatory late charges do not apply retroactively to loans
made before July 1, 1987, but would apply to any NDSL borrower
who has a re-signed revised promissory note.

*4* The school can use the services of the Department's Default
Reduction Assistance Project (DRAP) before the loan goes to a
collection firm; DRAP is discussed in Section 8, "Default."

Last Modified: 07/20/1998