EnterChapterTitle: William D. Ford Federal Direct Loan Program
Direct Loan Program borrowers and schools must meet federal
eligibility requirements outlined in the law and regulations. Chapters
2 and 3 provide extensive information about those requirements.
This section highlights eligibility information for borrowers and
STUDENT BORROWER ELIGIBILITY
Eligibility for a Direct Subsidized Loan or Direct Unsubsidized Loan
requires a student to be enrolled at least half time as a regular student
in an eligible program at a school participating in the Direct Loan
Program. Students may also obtain Direct Loans while enrolled in a
12-month period of preparatory coursework or in a teacher
certification program (see Section 2 for more information).
[[No FFELs and Direct Loans for same enrollment period]]
Although a postsecondary school may participate simultaneously in
the Direct Loan and Federal Family Education Loan (FFEL)
programs, a student may not borrow from both programs for
attendance at the same school for the same enrollment period.
Students without high school diplomas or recognized equivalents
may still be academically qualified and, thus, eligible for Direct
Loans. Such students must demonstrate the ability to benefit from the
instruction being offered. See Chapter 2 for detailed information on
how the student's ability to benefit is determined.
Incarcerated students and students enrolled in elementary or
secondary schools are not eligible for Direct Loans.
[[Federal Pell Grant eligibility]]
Schools that participate in the Federal Pell Grant Program must
determine Pell Grant eligibility before awarding Direct Subsidized
and Direct Unsubsidized Loans. If a student is eligible for a Pell
Grant, the school cannot originate a Direct Loan until the student has
applied for a Pell Grant for the same enrollment period. In addition,
before awarding a Direct Unsubsidized Loan, an aid administrator
must first determine whether the student is eligible for a lower-cost
Direct Subsidized Loan. Note that a school can award a Direct PLUS
Loan WITHOUT first determining whether the dependent student for
whom the parent is borrowing is eligible for a Pell Grant or Direct
To qualify for a DIRECT SUBSIDIZED LOAN, a student must have
financial need, which is determined by the following formula:
Cost of Attendance (COA)
-- Expected Family Contribution (EFC)
-- Estimated Financial Aid (EFA)
= Eligibility for Direct Subsidized Loans
The school establishes the COA in compliance with federal
guidelines. The EFC is calculated using financial information the
student's family provides on the Free Application for Federal Student
Aid (FAFSA), the only application a student needs to apply for
Direct Loans. The EFA includes the amount of the student's Federal
Pell Grant eligibility plus other aid the student will actually receive.
Although financial need is not considered when determining the
amount of DIRECT UNSUBSIDIZED LOANS and DIRECT PLUS
LOANS for which a borrower is eligible, the COA and EFA must be
taken into account:
= Eligibility for Direct Unsubsidized Loans/Direct PLUS Loans
Proceeds from Direct Unsubsidized Loans and Direct PLUS Loans
may be used to replace the EFC for a given loan period. (The same is
true for nonfederal loan proceeds.) See Chapter 2 for detailed
information about how eligibility for the Direct Loan Program (and
the other SFA Programs) is determined using the COA, EFC, and
Students must complete and sign a promissory note before receiving
their first Direct Loan disbursement. For more information on
promissory notes, see the Direct Loan School Guide.
[[Membership in religious organizations]]
As explained in Chapter 2, students who are members of certain
religious organizations are considered to have no financial need for
SFA Program purposes and are therefore ineligible for Direct
Subsidized Loans; however, these students may be eligible for Direct
Unsubsidized Loans. (Note that the parent of such a student is not
precluded from borrowing a Direct PLUS Loan for that student.) For
further details, see Chapter 2.
A student is INELIGIBLE to receive a Direct Loan while in a
medical internship or residency program. Students in DENTAL
internship programs are ELIGIBLE to receive Direct Loans.
[[Eligibility after disability cancellation]]
A student who has had a Direct Loan canceled due to total and
permanent disability may reestablish eligibility for a new loan by (1)
obtaining a statement from a physician certifying that the student can
engage in substantial gainful activity and (2) signing a statement
acknowledging that the new Direct Loan cannot be canceled because
of any impairment present when that loan is made, unless the
impairment substantially deteriorates.
[[Default, excess borrowing, and overpayment]]
Students who are in default on federal student loans, have obtained
federal student loan funds in excess of annual or aggregate loan
limits, or have received overpayments of SFA funds are not eligible
for Direct Loans or any other SFA Program funds. A student in any
of these situations can regain eligibility for SFA funds, including
Direct Loans, by repaying in full the amount owed or by taking other
- For purposes of regaining Direct Loan eligibility in cases of
default, the borrower must make "satisfactory repayment
arrangements," defined as six consecutive, voluntary, on time, full
monthly payments that are reasonable and affordable given the
borrower's financial situation. "On time" means a payment made
within 15 days of the scheduled due date. "Voluntary" payments
are those the borrower makes directly, regardless of whether a
judgment exists. Voluntary payments do not include those
obtained by income tax offset, garnishment, or income or asset
execution. For the purpose of regaining eligibility, a student may
make satisfactory repayment arrangements on a defaulted Direct
Loan only once.
- Students who have inadvertently exceeded loan limits or received
overpayments must make repayment arrangements satisfactory to
the holder of the loan or the holder of the overpayment debt.
Students who exceed Direct Loan limits, however, must contact
their Direct Loan Servicing Center to establish repayment
arrangements satisfactory to the Department.
[[Regaining eligibility during enrollment period]]
If a student regains eligibility during an enrollment period (for
example, if the sixth payment under a satisfactory repayment
arrangement is made after the start of an enrollment period), the
student regains eligibility for the entire loan period.
Chapter 2 discusses in detail overpayment, borrowing in excess of
loan limits, and regaining eligibility for SFA Programs. For more
information on the consequences of default for borrowers, see page
11-53 of this chapter.
PARENT BORROWER ELIGIBILITY
For purposes of Direct PLUS Loan eligibility, an eligible parent
borrower is a student's biological mother or father, adoptive parent,
or legal guardian. A parent also includes the spouse of a parent who
remarries, if that spouse's income and assets would be taken into
account when calculating a dependent student's EFC.
A parent must use the Direct PLUS Loan to pay for the educational
expenses of a dependent undergraduate student who meets the
requirements for an eligible student (see Chapter 2).
A parent must submit a Direct PLUS Loan application/promissory
note to the school or to the Department's Loan Origination Center,
depending on the school's origination level. A parent does not have
to complete the FAFSA unless the student for whom the parent plans
to borrow is applying for other SFA funds--or nonfederal funds--that
require the FAFSA. For more information on PLUS
application/promissory note procedures, see the Direct Loan School
[[General eligibility requirements]]
A parent must meet the same requirements as a student applying for
SFA Program funds when it comes to citizenship status, defaults,
overpayments, and previous loans canceled due to total and
permanent disability. A parent also must comply with the
requirements for submitting a Statement of Educational Purpose (see
Chapter 2). In addition, the parent must provide his or her Social
Security Number and the student's Social Security Number.
A parent is not allowed to borrow a Direct PLUS Loan and a Federal
PLUS Loan for the same student for the same enrollment period at
the same school.
[[Adverse credit history]]
Direct PLUS Loans are not available to a parent with an adverse
credit history unless he or she obtains an endorser with no adverse
credit history or demonstrates extenuating circumstances. (See
Section 2 for more information on credit history requirements.)
ELIGIBILITY AFTER BANKRUPTCY DISCHARGE
To be eligible for SFA Program funds, including Direct Loans,
borrowers do not have to reaffirm loan or overpayment obligations
discharged in bankruptcy. The Bankruptcy Reform Act of 1994
prohibits denial of aid based solely on a bankruptcy discharge.
However, a parent borrower who wishes to receive a Direct PLUS
Loan within 5 years following a bankruptcy discharge may be
required to obtain an endorser or document extenuating
A federal student loan or federal grant overpayment is not
dischargeable in bankruptcy unless the debt has been outstanding for
at least seven years, excluding any periods of deferment or
forbearance, or unless the bankruptcy court has determined that
repaying the debt would cause undue hardship to the debtor and his
or her dependents.
An applicant for SFA funds who has a defaulted federal student loan
(or grant overpayment) determined NONdischargeable in the
bankruptcy filing will be considered ineligible for further federal
student aid until the default or overpayment status is resolved as
discussed on page 11-5. If a default or overpayment occurred before
the borrower's bankruptcy filing and the debt was discharged in
bankruptcy, the applicant is eligible for further federal student aid.
The applicant does not have to establish satisfactory repayment
arrangements because the debt no longer exists.
REFUSAL TO ORIGINATE A LOAN
A school may refuse to originate any Direct Loan or may originate
an amount less than a borrower's calculated need if the school
- decides on a case-by-case basis;
- does not engage in any pattern or practice that results in denying
access to Direct Loans because of a borrower's race, gender, color,
religion, national origin, age, disability status, or income;
- documents the reason for the decision and keeps that
documentation in the student's file; and
- notifies the student or parent in writing of the decision.
[[Future merger of Direct Loan and general applications]]
The Department selects schools to participate in the Direct Loan
Program, drawing from colleges, universities, graduate and
professional schools, vocational schools, and proprietary schools. To
the extent possible, the Department selects schools reasonably
representative of those participating in the FFEL Program in terms of
anticipated loan volume, length of academic program, type of
control, highest degree offered, size of enrollment, geographic
location, and default history. At the time this Handbook went to
print, schools applied to participate in Direct Loans by filling out a
separate William D. Ford Federal Direct Loan Program Participation
Application. The Department plans to eliminate the Direct Loan
application and incorporate it into the Application for Approval to
Participate in Federal Student Financial Aid Programs. Schools will
be notified when this change occurs.
To participate in the Direct Loan Program, schools must meet the
general institutional eligibility definitions and criteria described in
Chapter 3. Direct Loan schools also must meet and maintain other
requirements, as discussed below.
A school offering programs EXCLUSIVELY for study by
correspondence is not eligible to participate in Direct Loans.
To qualify for initial participation in the Direct Loan Program, a
school must not be subject to an emergency action or a proposed or
final Limitation, Suspension, and Termination action. In addition, a
school must meet the eligibility requirements in Section 435(a) of the
Higher Education Act, including the requirement that the cohort
default rate be less than 25% for at least one of the three most recent
fiscal years for which data are available. Note that the cohort default
rate requirement is not solely an initial participation requirement. See
Section 4 for information on cohort default rate requirements.
[[Program Participation Agreement]]
To participate in Direct Loans, a school must sign an addendum to
the Department's Program Participation Agreement. The chief
executive officer signs the agreement on the school's behalf.
If schools apply as a consortium, each school in the consortium must
meet the eligibility requirements described above and must sign a
separate Program Participation Agreement.
The signed agreement obligates the school to comply with statutory
and regulatory requirements. The agreement allows schools to
participate simultaneously in the Direct Loan and FFEL programs;
however, as mentioned earlier, students may not receive loans under
both programs for the same enrollment period at the same school.
The agreement requires schools to identify eligible students, estimate
their financial need, and certify that borrowers have not exceeded
annual or aggregate loan limits. Schools also must provide timely
and accurate information to help the Department service the loans
and collect repayments. Such information includes the status of
student borrowers--and the status of students for whom parents have
borrowed--while these students are still enrolled. In addition, at the
Department's request, a school must provide any new information
about borrowers obtained after the students leave school.
Other provisions in the agreement require schools to
- refrain from charging fees of any kind for origination activities or
for providing Direct Loan information to student or parent
- implement a quality assurance system, and
- comply with other provisions the Department determines
necessary to protect the interests of the United States and to
promote the Direct Loan Program's purposes.
[[Requirements for Option 1 and Option 2 schools/consortia]]
Option 1 or 2 schools or consortia must meet additional criteria:
- have participated in the Federal Perkins Loan Program or the
Federal Pell Grant Program or, for a graduate or professional
school, have participated in a similar program for the three most
- not be on the reimbursement system of payment in the Federal
Pell Grant Program;
- have had no severe performance, audit, or program review
deficiencies for any SFA Program;
- be financially responsible in accordance with the standards of
34 CFR 668.15;
- be current on program and financial reports and SFA audits for
the 12-month period immediately preceding the Direct Loan
- be current on required federal cash transaction reports and have
no final determination of cash on hand that exceeds "immediate
- have no material findings in annual financial audits submitted for
the three most recent years preceding the date of application to
participate in Direct Loans; and
- provide assurance that the school has no delinquent debts to the
federal government, unless the debts are being repaid under an
arrangement satisfactory to the government or unless the
Department decides the appropriate federal agency has not
determined the existence or amount of the debts.
[[Participation for deferment purposes only]]
A school that has never participated in SFA Programs but wants to
be considered an eligible school FOR DEFERMENT PURPOSES
ONLY must prove, before it can certify deferment forms, that it
meets the Department's definition of an eligible school. For more
information about eligibility for deferment purposes, schools should
U.S. Department of Education
Room 3522, Institutional Participation Division
600 Independence Avenue, SW
Washington, DC 20202-5323
WITHDRAWING FROM THE DIRECT LOAN PROGRAM
A school may withdraw from the Direct Loan Program by notifying
the Department in writing at least 60 days before the planned
withdrawal date. Unless the Department approves an earlier date, the
withdrawal is effective (1) 60 days after the school notifies the
Department or (2) the date the school designates, whichever is
Whether program withdrawal is voluntary or the result of
Department action, an SFA audit is required as is a final
reconciliation to account for all funds drawn down.
[[Loss of eligibility]]
For steps a school must take if it loses its eligibility to participate in
Direct Loans, see Chapter 3. For loss of eligibility due to high cohort
default rates, see page 11-61.