Maintained for Historical Purposes

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

Federal Family Education Loan Program - Payment to the Borrower

AwardYear: 1997-1998
EnterChapterNo: 10
EnterChapterTitle: Federal Family Education Loan Program
SectionNumber: 3
SectionTitle: Payment to the Borrower
PageNumbers: 33-44


The lender disburses loan proceeds to the school for delivery to the
student or parent borrower. A school may credit loan proceeds to the
student's account, pay the student or parent directly, or combine
these methods.


DEFINITIONS OF DELIVERY AND DISBURSEMENT

A delivery of funds to the student occurs on the date the student's
school account is credited by that school or on the date the borrower
(student or parent) directly receives the Federal Family Education
Loan (FFEL) funds from the school. If a school combines these
methods of payment, delivery occurs on the earlier of the two dates.
For a school that uses its own institutional funds to credit the
student's school account or to pay the student before the FFEL funds
are received from the lender, delivery occurs on the date that those
institutional funds are credited to the student's account or paid
directly to the borrower. Again, if a school combines these methods
of payment, delivery occurs on the earlier of the two dates.

If a school credits a student's account with institutional funds more
than 10 days before the first day of classes, the delivery is considered
to have occurred on the 10th day before the first day of classes.
Similarly, if a school credits the account of a first-time, first-year,
undergraduate borrower with institutional funds sooner than 30 days
after classes start, the delivery is considered to have occurred on the
30th day after classes start. Disbursement of FFEL funds is made by
a lender; delivery of those funds is made by a school. However, for
the purposes of the cash management rules, disbursement is used to
mean delivery. See Chapter 3 for more information on cash
management.

[[Separate office for authorizing and delivering]]
Because the functions of authorizing payment and delivering loan
proceeds must be separate, no single office at the school is permitted
to carry out both functions.

FINANCIAL AID HISTORY AND NSLDS

As stated in Section 2, during the loan application process, a
financial aid administrator must request a financial aid transcript
(FAT) from each eligible school a student previously attended or
must use the National Student Loan Data System (NSLDS) to obtain
the student's previous financial aid information. It is the financial aid
administrator's responsibility to determine whether a student
previously attended an eligible school and to obtain the proper
information. (Procedures for obtaining FATs are described in
Chapter 3.) Until a school receives an FAT from each of a student's
previously attended schools, the school may not deliver Federal
Stafford Loan proceeds to a student. In the case of a Federal PLUS
Loan, the financial aid administrator must not even certify the
application until the school receives an FAT from each of the
benefitting student's previous eligible schools.

A school may NOT release funds to the student if information a
previous school provided indicates that the student is in default on an
Student Financial Assistance (SFA) loan or if that the student owes a
repayment on an SFA grant. See Chapter 2 for information on these
eligibility issues.

METHODS OF DISBURSING AND DELIVERING LOAN FUNDS

Disbursement to School

Because authorization for a lender's disbursement by EFT or master
check is collected on the common Stafford Loan and PLUS Loan
applications, a school is not required to obtain a separate written
authorization for the lender's disbursement in most cases. If a lender
disburses Stafford Loan or PLUS Loan proceeds by EFT or master
check and the borrower did not provide authorization on the
application, the school must obtain the borrower's written
authorization for the lender's disbursement of the initial and any
subsequent disbursement. The school must collect this authorization
not more than 30 days before the first day of classes of the
enrollment period.

With the first disbursement of loan proceeds, the lender must provide
the borrower with a copy of the completed promissory note and
repayment information. A school is also required to provide certain
notifications to borrowers before delivering loan funds to them.

See Chapter 3 of this handbook for more information on required
authorizations and notifications. Chapter 3 also provides information
on a borrower's right to cancel a loan or a portion of a loan before or
soon after the time of disbursement.

Delivery to Borrower

A school may deliver FFEL funds directly by releasing the lender's
check to the borrower (student or parent), by crediting the borrower's
bank account via an electronic funds transfer (EFT), by issuing a
check, or by paying the borrower in cash. Before delivering funds, a
school must obtain the borrower's authorization to do so. The school
must keep the authorization in the student's file.

A check a school issues to a borrower must be made payable to the
borrower and must be endorsed or certified by that borrower. (The
school issues the check by releasing or mailing it to the borrower or
by notifying the borrower that the check is available for immediate
pickup.) A borrower receiving cash from a school must provide the
school with a signed receipt when receiving the funds.

DISBURSEMENT AND DELIVERY REQUIREMENTS

The School's Role

A school may not deliver the first FFEL installment to a first-time,
first-year undergraduate until 30 days after the first day of the
student's program of study.

[[Check requiring borrowing endorsement]]
In the case of a lender that disburses FFEL funds to a school by
check requiring the endorsement of the borrower, a school may not
request lender disbursement of the borrower's loan proceeds until the
30th day before the first day of classes for a payment period.

[[First-year, first-time borrowers]]
For first-year, first-time borrowers, a school may not request the first
disbursement until the first day of classes of the first payment period.
For any subsequent payment period, a school may not request a
disbursement earlier than 30 days before the first day of classes.

[[EFT or master check]]
In the case of a lender that disburses FFEL funds to a school by EFT
or master check, a school may not request lender disbursement of the
borrower's loan proceeds until the 13th day before the first day of
classes of a payment period. (This time frame applies to PLUS Loans
as well.)

[[First-year, first-time borrowers]]
For first-year, first-time borrowers, a school may not request the first
disbursement until the 27th day after the first day of classes of the
first payment period. For any subsequent payment period, a school
may not request a disbursement earlier than 13 days before the first
day of classes. (Both time frames apply to PLUS Loans as well.)

[[Resuming enrollment--34 CFR 682.604(b)(2)(iv)]]
Before each disbursement is made, a school must review the
student's eligibility to ensure that he or she remains eligible for the
disbursement. If a student temporarily ceases to be enrolled at least
half time before any FFEL funds are disbursed, the lender may still
make a first disbursement (and subsequent disbursement) if the
student resumes enrollment at least half time. The school must
review the student's cost of attendance (COA) and revise it as
necessary to ensure the student continues to qualify for the entire
amount of the loan, even though the COA may be lower. The school
must document this review in the student's file. Reaffirmation of loan
eligibility requires the school to verify Pell Grant eligibility (if
applicable), to establish that the student has maintained satisfactory
academic progress standards, and to verify enrollment status. When
the school reports the student's change in enrollment status, it must
also request that the lender make the second or subsequent
disbursements. Otherwise, the lender is required by law to cancel the
second disbursement.

The Lender's Role

A lender must give a borrower a copy of an initial disclosure
statement prior to, or at the time of, the first loan disbursement. This
statement must indicate:

- in bold print that this is a loan that must be repaid;

- the principal amount of the loan;

- the actual interest rate;

- the amount of any charges, including the origination fee if
applicable, and the insurance premium, to be collected by the
lender before or at the time of each disbursement on the loan;

- when repayment is required and when the borrower is required to
pay the interest that accrues on the loan;

- the name and address of the lender and the address to which
communications and payments should be sent;

- that the lender may sell or transfer the loan to another party and
that the address and identity of the party to which correspondence
and payments should be sent may change;

- the yearly and cumulative maximum amounts that may be
borrowed;

- that information concerning the loan (including the amount of the
loan and the date of disbursement) will be reported to a credit
bureau;

- the minimum annual payment required, and minimum and
maximum repayment periods;

- an estimate of the monthly payment due the lender, based on the
borrower's cumulative outstanding debt (including the loan
applied for);

- refinancing and consolidation options;

- that the borrower has the right to make prepayments;

- circumstances under which repayment of principal or interest on
the loan may be deferred and an explanation of forbearance;

- that the U.S. Department of Defense offers a repayment option (as
an enlistment incentive);

- the definition of default (and the consequences of default);

- the effect of the loan on eligibility for other student assistance; and

- an explanation of borrower costs incurred in collection of the loan.

The information on the disclosure statement must be the most up-to-
date information concerning the loan and must reflect any changes in
laws or federal regulations that may have occurred since the
promissory note was signed. If the student has questions about the
statement, he or she should contact the lender immediately. If the
student wishes to cancel the loan, he or she should contact the school
immediately. In either case, the student should NOT endorse a loan
check or an EFT form authorizing transfer of loan proceeds to his or
her account.

[[Multiple disbursement requirements]]
A lender must deliver loan proceeds in at least two installments. No
installment may exceed one-half the loan amount. There are two
exceptions to this multiple disbursement requirement:

- A lender is not required to disburse a Federal Consolidation Loan
in more than one payment.

- A lender is not required to make more than one disbursement of
any FFEL if the school the student is attending is not in a state.

Chapter 3 discusses in detail the requirements of the cash
management regulations published on November 29, 1996. The
discussion here will focus on how those regulations affect FFEL
disbursement procedures.

[[Disbursement schedule requirements]]
If a school's program uses standard academic terms (for example,
semester, trimester, or quarter) and measures progress in credit
hours, disbursements are made as follows:

- If there is only one term, a lender disburses a FFEL in equal
amounts at the beginning of the term and at the term's calendar
midpoint. However, if any payment period has elapsed before a
lender makes a disbursement, the lender may include in the
disbursement the proceeds for all completed payment periods.
Similarly, if a loan period equals one payment period and more
than half of it has elapsed, a lender may include in a disbursement
the proceeds for the entire payment period.

- If there is more than one term, funds must be disbursed over all
terms of the loan period. For example, if a loan period includes all
three quarters of an academic year, the loan must be disbursed in
three basically equal payments. Previously, quarter-based schools
could have disbursed loan funds for all three quarters in two
disbursements.

If a school's program measures progress in clock hours or in credit
hours without using standard terms, disbursements are made as
follows:

- If the program is one academic year or shorter, a lender disburses
a FFEL in equal amounts at the beginning of the term and at the
term's calendar midpoint. The second disbursement may not be
made, however, until the later of

- the calendar midpoint between the first and last scheduled days
of class of the loan period, or

- the date (determined by the school) that the student has
completed half of the academic coursework (for credit hour
schools) or half the clock hours (for clock hour schools) in the
loan period.

- If the program is longer than an academic year, the lender makes
disbursements as described above for the first and any subsequent
full academic year. If the remaining portion of the program is less
than a full academic year, the lender disburses a FFEL in equal
amounts at the beginning of the remaining portion and at the
portion's calendar midpoint. Again, the second disbursement may
not be made until the later of the two dates described above.

OVERAWARDS

If an overaward is identified after a school has received Stafford
Loan proceeds but before the school has delivered the proceeds to
the student, the school may attempt to reduce or eliminate the
overaward by changing the function of an unsubsidized loan (an
unsubsidized Stafford Loan, a nonfederal loan, or the parents' PLUS
Loan) from covering need to replacing the EFC.

If the school can eliminate the overaward by reducing or canceling
subsequent disbursements of the loan, the school may do so and
deliver the first disbursement to the student. The school must inform
the lender of the reduced award and request cancellation or reduction
of subsequent disbursements.

Prior to the delivery of loan proceeds to the student, if the student is
determined to be ineligible for the entire loan disbursement and if the
overaward cannot be reduced or eliminated, the school must return
the loan proceeds to the lender. The lender must credit to the
borrower's account the portion of the insurance premium and
origination fee attributable to the amount returned.

If the student is ineligible for only a part of the disbursement, the
school has two options:

1) The school may return the loan proceeds to the lender and
request a new check for the correct amount. If the school chooses
this option and asks for a new disbursement, the student will pay
only for the reduced insurance premium and origination fee (if
applicable) attributable to the reduced loan amount.

2) The school may have the student endorse the loan check or, in
the case of a loan disbursed by electronic funds transfer (EFT),
obtain the student's authorization to release loan funds. The school
may then credit the student's account for the amount for which the
student is eligible and promptly refund to the lender the portion of
the disbursement for the which the student is ineligible.

THE SCHOOL, NOT THE STUDENT, MUST RETURN ANY
EXCESS LOAN PROCEEDS.

The following example shows possible resolutions for an overaward:

Bailey's subsidized Stafford Loan was certified for $2,000 ($1,000
for each semester of the school year). She received a $500
scholarship after the school received the first $1,000 disbursement.
Bailey's need for the loan period is now $1,500. Her school could

- return the loan proceeds to the lender and ask for a revised loan
amount of $1,500 in two $750 installments;

- deliver $750 of the first disbursement to Bailey, return $250 to
the lender, and request that the lender reduce the second
disbursement by $250 in order to disburse the revised loan
amount in two equal installments; or

- deliver $500 of the first disbursement to Bailey and return the
remaining $500 to the lender to eliminate the entire overaward
in the first disbursement. The second disbursement would
be $1,000.

When an award in excess of need is identified AFTER the school has
delivered all Stafford Loan proceeds to the student, an overaward
does not exist, and a refund to the lender is not required.

These instructions for handling overawards do not have to be applied
to Stafford Loans made to cover the COA at a school outside the
United States or to PLUS Loans.

CREDIT BALANCES

A school must pay a credit balance directly to a student or parent

- no later than 14 days after the balance occurred if the credit
balance occurred after the first day of class of a payment period or

- no later than 14 days after the first day of class of a payment
period if the credit balance occurred on or before the first day of
class of that payment period.

Note that this 14-day requirement is now a standard for all SFA
programs.

A school may hold any additional loan proceeds in excess of those
necessary to cover allowable school charges the student owes (for
use during the remainder of the academic year) ONLY with the
student's written authorization. A school may not require or coerce a
student to provide authorization, and a school must allow for
cancellation or modification at any time.

[[Deposit of credit balances--34 CFR 668.165(b)]]
The credit balance must be deposited in a subsidiary ledger account;
also, the school must maintain cash in its bank account for an amount
equal to the amount of the funds the school holds for the student.

A school must pay any remaining balance on loan funds by the end
of the loan period in the award year for which the funds were
awarded.

In the case of a PLUS Loan, a school must obtain the parent
borrower's written authorization to deliver a credit balance of PLUS
funds directly to the student. Otherwise, the school must deliver
these funds to the parent.

LATE DISBURSEMENT

If the lender disburses the Stafford Loan or PLUS Loan proceeds
after the end of the period of enrollment for which the loan was
made, the proceeds must be returned to the lender within 30 days,
UNLESS THE PROCEEDS ARE THE FIRST DISBURSEMENT
OF THE LOAN AND COME WITH A NOTICE FROM THE
LENDER STATING THAT THIS REPRESENTS A LATE FIRST
DISBURSEMENT. Similarly, if the lender disburses the loan
proceeds before the end of the enrollment period but after the student
has left school or dropped below half-time status, the school must
return the loan proceeds to the lender within 30 days unless this
disbursement is a late disbursement.

Under FFEL Program regulations, a lender may make a late
disbursement (that is, disburse loan proceeds after the student is no
longer enrolled on at least a half-time basis) of a Stafford Loan or
PLUS Loan only if the student became ineligible solely due to his or
her change in enrollment status.

A school may disburse late funds (Stafford or PLUS) only if the
school certified the loan application before the student dropped
below half-time enrollment AND the loan funds will be used to pay
educational costs that the school determines the student incurred for
the period in which he or she was enrolled and eligible. If the student
is a first-year, first-time borrower, he or she must also have
completed the first 30 days of his or her program of study to receive
a late disbursement of a Stafford Loan or to benefit from the late
disbursement of a PLUS Loan.

A school may make a late disbursement of a Stafford Loan or PLUS
Loan no later than 90 days after the date that the borrower became
ineligible for the loan.

A school may not make a late second or subsequent disbursement of
a Stafford Loan unless the student has graduated or successfully
completed the period of enrollment for which the loan was intended.

BORROWER INELIGIBILITY AND RETURN OF FUNDS TO
LENDER

10-Day Periods

The regulations provide for three discrete 10-day periods for
disbursing and returning FFEL Program funds.

For purposes of the cash management regulations and this
discussion, returning funds "promptly" means that a school may not
delay initiating and completing its normal process for returning
FFEL Program funds to lenders.

Also for these purposes, the requirement that a school "return funds
no later than 10 business days" means that a school must mail a
check or initiate an EFT of FFEL funds to the lender by the close of
business of the last day of the return period.

Initial Period

For FFEL Program funds a school receives from a lender via EFT or
master check, a school must disburse those funds to eligible students
(or, for PLUS Loan funds, to parents of eligible students) no later
than 10 business days after the school receives the funds.

For FFEL Program funds that a school receives from a lender via a
check requiring the endorsement of the student (or parent), the
school must disburse those funds to eligible students (or, for PLUS
Loan funds, to parents of eligible students) no later than 30 calendar
days after the school receives the funds.

Conditional Period

A school has 10 business days after the last day of the initial period
to disburse FFEL Program funds only if

- the student did not satisfy a programmatic requirement necessary
to receive the funds during the initial period AND

- the school expects the student to satisfy that requirement during
the conditional period.

Return Period

For FFEL Program funds that a school does not disburse by the end
of the initial or conditional period, as applicable, the school must
return those funds to the lender promptly but no later than 10
business days from the last day of that initial or conditional period.
However, if a student becomes eligible to receive FFEL program
funds during the return period, the school may disburse those funds
provided that the disbursement is made on or before the last day of
the return period.

Student's Failure to Register, Begin Delayed Attendance, or
Complete Verification

If a school discovers that a student did not register for the period of
enrollment covered by the loan or did not begin delayed attendance
within the first 30 days of enrollment, the school must return the loan
proceeds to the lender within 30 days of this determination. If a
student registers and receives the loan proceeds but attends less than
half time or is otherwise found to be ineligible for all or part of the
loan, the student has failed to qualify for the loan, and the lender
must immediately demand full loan repayment. It is the borrower's
responsibility to notify the lender if he or she fails to enroll at least
half time after receiving the loan. (The school must also notify the
lender of the borrower's loan ineligibility.) It is also the borrower's
responsibility to repay the amount due if he or she fails to qualify for
it. IF THE BORROWER FAILS TO REPAY THE LOAN, THE
LENDER, AFTER FOLLOWING DUE DILIGENCE
REQUIREMENTS (WHICH INCLUDE DEMANDING PAYMENT
IN FULL), MAY FILE A DEFAULT CLAIM FOR THE FULL
LOAN AMOUNT.

A school must return Stafford Loan proceeds to the lender if a
student selected for verification does not complete the verification
process within 45 days of the school's receipt of the proceeds. See
The Verification Guide, 1996-97 for more information on
verification.

Effect of Returned Funds on Loan Fees

If a school returns a disbursement or any portion of a disbursement
to the lender, the origination fee and insurance premium are reduced
in proportion to the amount returned. If a student returns a
disbursement or any portion of a disbursement to the lender, the
origination fee and insurance premium are reduced in proportion to
the amount returned ONLY IF THE LENDER RECEIVES THE
RETURNED AMOUNT WITHIN 120 DAYS AFTER
DISBURSEMENT.

REIMBURSEMENT PAYMENT METHOD

A school placed under the reimbursement payment method (for the
Federal Pell Grant Program, Direct Loan Program, or campus-based
programs) may not disburse FFEL Program funds to a borrower until
the Department approves a request from the school to make a
disbursement for that borrower. If prohibited by the Department, a
school may not certify a borrower's loan application until the
Department approves a request from the school to make the
certification for the borrower. For the Department to approve a
school's disbursement or certification request, the school must submit
documentation verifying each borrower's eligibility for disbursement
or certification. (A school participating only in the FFEL Program
may also be subject to this requirement if the Department deems the
requirement necessary.)

Last Modified: 07/28/1998