Bulletin ID
DLB - 93 - 4
| PublicationDate: 12/1/93 BulletinID: DLB - 93 - 4 Direct Loan Bulletin # 4, December 1993 Dear Colleague: This bulletin provides an update on the Federal Direct Student Loan Program (Direct Loans) and information on many of the Direct Loan Program provisions of the Student Loan Reform Act of 1993 (SLRA). We hope the attached information will simplify and clarify the information on the Direct Student Loan Program. We will, of course, continue to provide you with information as it becomes available. Sincerely, David A. Longanecker Assistant Secretary for Postsecondary Education UPDATE The Department published a Notice in the Federal Register on September 10, 1993 that established application procedures for schools wanting to participate in the Federal Direct Student Loan Program (Direct Loans) for the 1994-95 academic year. The Department received more than 1,100 applications; of these, 900 were eligible (see page 3 for eligibility criteria). However, because the law specifies that, for 1994-95, the percentage of Direct Loans made must not exceed 5 percent of new student loan volume (see page 2), the Department had to limit its selection of participating schools to 105. It is estimated that these schools will provide over one billion dollars in loan volume for 1994-95. In mid-November, the Department notified the schools selected. Training for these schools is scheduled to begin in January. Selected Provisions of the Student Loan Reform Act (SLRA) of 1993 The following information is an overview of many of the SLRA provisions concerning the Federal Direct Student Loan Program. We will provide more details about these and other SLRA provisions in future bulletins. Phase-In of the Federal Direct Student Loan Program To ensure an orderly transition from the Federal Family Education Loan (FFEL) Program to the Direct Loan Program, the Direct Loan Program will be phased in. The percentage of Direct Loans made will increase gradually over the next several academic years: Academic Year % New Student Loan Volume* 1994-95 5% 1995-96 40% 1996-97 50+% 1997-98 50+% 1998-99 60+% Beginning in 1996-97, the percentages given above may be exceeded if the eligible schools that want to participate have loan volumes greater than the percentage goals called for in the SLRA. Regulatory Activities For the 1994-95 academic year, the SLRA directed the U.S. Department of Education to publish a Notice, instead of regulations, in the Federal Register, describing application procedures for schools that want to participate in the Direct Loan Program. (See UPDATE on page 1.) For the 1995-96 academic year, all standards, criteria, procedures, and regulations concerning the Direct Loan Program are subject, to the extent practicable, to negotiated rulemaking. School Participation in the Direct Loan Program Schools could apply to participate in the Direct Loan Program if they were eligible institutions under Section 435(a)** of the Higher Education Act, as amended. Eligible schools will participate by originating loans themselves or by using an alternate loan originator. (The Department will provide alternative origination services through one servicer for 1994-95. More information about this servicer will be published in a future Direct Loan Bulletin.) Whatever method of participation is chosen, schools selected to participate must sign a Program Participation Agreement. (See Attachment A for a description of the Agreement's contents.) NOTE: At the Department's discretion, schools may participate in the Direct Loan and FFEL programs at the same time, although students and parents may borrow under only one program per loan period. As specified in the September 10, 1993 Federal Register Notice, schools participating in both FFEL and Direct Loan programs may certify loans under the FFEL Program only to those borrowers with an outstanding balance on an FFEL Program loan. Borrowers who have no outstanding balance on an FFEL may receive loans only under the Direct Loan Program. Further, a parent of an eligible student may borrow only under the program from which the student borrowed, or would have borrowed, if the student had received a loan. School Selection Criteria To originate Direct Loans for the 1994-95 academic year, schools must also sign a supplemental Program Participation Agreement that will include provisions similar to the basic Agreement. In addition, originating schools in 1994-95 must meet the following eligibility criteria: Have made Federal Perkins Loans in the 1993-94 academic year. In addition, the school's default rate under this program must be 15 percent or lower in the most recent fiscal year for which data are available. Must not be on the reimbursement system of payments under the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant, Federal Work-Study, or Federal Perkins Loan programs. Must not be overdue on any program or financial reports or audits required for any Title IV programs. Must not be subject to an emergency action, or a limitation, suspension, or termination action. Have not had severe performance deficiencies for any Title IV program, including deficiencies discovered by any audits or program reviews submitted or conducted during the five calendar years preceding the date the school applies to participate in the Direct Loan Program. Have no delinquent outstanding debts to the federal government, unless a school has made satisfactory arrangements to repay the debt, or unless the Department decides that the existence of the debt or its amount has not been determined by the appropriate federal agency. Meet other criteria the Department may establish. In the September 10, 1993 Federal Register Notice, the Department established additional criteria a school must meet to participate in the Direct Loan Program for 1994-95: Must have a cohort default rate of less than 25 percent in one of the two most recent years for which cohort default rates are available. (The Department has reserved the right to exempt Historically Black Colleges and Universities, tribally controlled community colleges, and Navajo Community Colleges.) Must participate electronically to originate loans. Schools that are not currently participating electronically must be willing and capable of doing so in the near future. The Department strongly considered schools that currently participate in the Department's Electronic Data Exchange program. The Notice also states that ED would select schools that have demonstrated both a strong commitment to direct lending and the capacity to administer the Direct Loan Program. NOTE: For those schools that participate in the Direct Loan Program through a consortium agreement, each school in the consortia must meet all the criteria listed. For 1995-96 and subsequent years, the Department will publish regulations governing a school's approval to originate Direct Loans. In addition to selecting schools that meet the basic eligibility criteria described on pages 3 and 4, the Department chose, in keeping with Congress's intent, schools that are a representative and proportional sample of all types of eligible postsecondary institutions, to the extent practical. The Department, therefore, selected schools based on: o anticipated loan volume o length of academic program o institutional control o highest degree offered o size of student enrollment o location o annual loan volume o default experience Fees for Schools that Originate Direct Loans The Department will pay a fee to each school originating to help meet the costs of loan origination. For the 1994-95 academic year, the fee will be an average of $10 per borrower. For succeeding academic years, the fee will be established by regulations. Loan Terms and Conditions Loans under the Federal Direct Student Loan Program are designated as Federal Direct Stafford Loans (Section 428), Federal Direct PLUS Loans (Section 428B), and Federal Direct Unsubsidized Stafford Loans (Section 428H). Applying Students will use the "Free Application for Federal Student Aid" (FAFSA) to apply for Federal Direct and Unsubsidized Stafford Loans. A separate loan application will be required for Federal Direct PLUS Loans. The Department will develop, print, and distribute to participating schools a standard promissory note and loan disclosure form. Interest Rates For Direct and Unsubsidized Stafford Loans, interest rates will be variable (effective July 1 through June 30 of each year) but will not exceed 8.25 percent. For Direct PLUS Loans first disbursed on or after July 1, 1994, the interest rate will be variable but will be capped at 9 percent. Loan Limits-Federal Direct and Unsubsidized Stafford Loans Loan limits for dependent undergraduate students are the same as loan limits under the existing Federal Stafford Loan Program. However, independent undergraduates may borrow additional amounts in Federal Direct Unsubsidized Stafford Loans. (Dependent undergraduates whose parents cannot borrow under the Federal Direct PLUS Program may also borrow under the Federal Direct Unsubsidized Stafford Loan Program.) The SLRA repeals the Federal Supplemental Loans for Students (SLS) Program (effective July 1, 1994), but the amounts available under SLS have been, in effect, incorporated into the Federal Direct Unsubsidized Stafford Loan Program. Thus, an independent undergraduate can borrow up to: $6,625, if the student is a first-year student enrolled in a program of study that is a full academic year. (At least $4,000 of this amount--the old SLS amount--must be in Direct Unsubsidized Stafford Loans.) $7,500, if the student has completed his or her first year of study, and the remainder of the program is a full academic year. (Again, at least $4,000 of this amount must be in Direct Unsubsidized Stafford Loans.) $10,500 a year, if the student has completed two years of study, and the remainder of the program is at least one academic year. (At least $5,000 of this amount--the old SLS amount for a student at this level--must be in Direct Unsubsidized Stafford Loans.) Of course, for periods of undergraduate study that are less than an academic year, the amounts the student can borrow will be less. Similarly, the loan limits for graduate students have increased to $18,500 a year. (At least $10,000 of this amount must be in Direct Unsubsidized Stafford Loans.) The total Federal Direct Stafford Loan debt a student can have outstanding as a dependent undergraduate is $23,000; as an independent undergraduate, $46,000. The total debt allowed for graduate or professional study is $138,500 ($65,500 in Federal Direct Stafford Loans and $73,000 in Direct Unsubsidized Stafford Loans). NOTE: The annual limit for Federal Direct PLUS Loans is the same as for non-Direct PLUS Loans: the dependent student's cost of education minus any estimated financial aid received. Loan Fees The Department will charge Federal Direct Stafford Loan and Federal Direct PLUS Loan borrowers a loan fee of four percent of the principal. Loan Disbursement Schools will apply loan proceeds to a student's account for tuition and fees and, in the case of institutionally owned housing, for room and board. The student must acknowledge that the loan proceeds will be disbursed in this manner. Schools must pay a student any remaining loan proceeds by check or other means payable to the student that requires his or her endorsement or other certification. Schools will disburse Federal Direct Stafford Loans in a manner consistent with that of the Federal Pell Grant Program. Payment periods will also be consistent with those established by the Pell Grant Program. (See FISCAL CONTROL AND FUND ACCOUNTABILITY, page 9.) Loan Repayment Borrowers may choose among a variety of repayment plans for Direct Loans: Standard plan--a fixed annual repayment amount (generally, $50 a month) paid over a fixed period of time, not to exceed 10 years. Extended repayment plan--a fixed annual repayment paid over a period of time longer than 10 years. The borrower must still pay a yearly minimum (usually, at least $600 a year, as specified in Section 428(b)(1)(L) of the Higher Education Act, as amended), but has a longer time to repay. Graduated repayment plan--annual payment amounts at two or more levels paid over a fixed or extended period of time. Payments must be at least half, but not more than one-and-one-half, of what the payment would be if the loan were repaid under the standard repayment plan. Income contingent repayment plan--varying annual repayment amounts based on the borrower's Adjusted Gross Income (and that of the borrower's spouse, if a joint return is filed), paid over a period not to exceed 25 years. NOTE: PLUS borrowers are not eligible for this plan. Income contingent repayment schedules will be established by regulation. Payments will vary in relation to the "appropriate portion" of the borrower's (and spouse's) annual income. The Department will determine the "appropriate portion." A borrower who has defaulted may be required to repay the loan according to an income contingent repayment plan. If the borrower does not select one of the four repayment plans, the Department will choose a standard, extended, or graduated repayment plan for the borrower. The borrower may change the type of payment plan he or she originally chose (or that was chosen for him or her) under terms and conditions the Department will establish. On a case by case basis, the Department may approve an alternative repayment plan if the borrower can demonstrate that none of the plans above can accommodate the borrower's exceptional circumstances. The alternative plan may not exceed the cost of any of the four plans discussed above. The borrower may accelerate his or her repayment without penalty. Borrower Defenses Against Repayment The Department will specify in regulations what acts or omissions of a school a borrower may assert as a defense against repaying a Federal Direct Student Loan. However, a borrower may not recover from the Department an amount that exceeds what he or she has repaid on the loan. Deferments During deferment periods, payment of principal will be postponed (and the Department will pay the interest on subsidized Direct Stafford Loans). Deferments may be granted for: - at least half time study at a postsecondary institution, - study in an approved graduate fellowship program or in a rehabilitation training program for the disabled, - unemployment (up to three years), and - economic hardship (up to three years). For Direct PLUS and Direct Consolidation borrowers, a deferment is not available for a medical internship or residency. Bankruptcy The limits that currently exist in Section 532(a)(6) of the Bankruptcy Code to prevent the discharge of FFELs in bankruptcy also apply to Direct Loans. (The limits specify that student loans will not be discharged except in cases where the loans first became due more than seven years before the date the bankruptcy was filed, or where failure to allow the discharge would cause the borrower and his or her dependents undue hardship. These provisions apply to both Chapter 7 and Chapter 13 bankruptcy cases.) Federal Direct Consolidation Loans Direct Loan borrowers may consolidate those loans with Federal Stafford Loans, Federal Perkins Loans, and loans made under the Federal Supplemental Loans for Students Program, but only under terms and conditions the Department will publish, either in a Federal Register Notice (for 1994-95), or in regulations (for subsequent years). Fiscal Control and Fund Accountability It is the SLRA's intent that schools be able to maintain uniform financial records, distribution systems, and methods of payment reconciliation for all their federal student aid programs. Therefore, a school may maintain its Direct Loan funds in the same account as other federal student aid programs, unless otherwise required by regulations. It is also the SLRA's intent that the Direct Loan Program use the Federal Pell Grant delivery system as a model. The Department will provide schools with the necessary software to carry out all required management and operation functions for the Direct Loan Program. ATTACHMENT A PROGRAM PARTICIPATION AGREEMENT The Program Participation Agreement between the U.S. Department of Education and schools participating in the Federal Direct Student Loan Program will set forth a school's responsibilities in maintaining the Direct Loan Program, which include: - determining a students eligibility for financial aid, as is done for other Title IV programs. - estimating a student's financial need. - ensuring that students sign a certification statement affirming that the amount they borrow will not exceed the Direct Loan annual or aggregate limits. (In exceptional circumstances that the Department will specify, schools can refuse to certify a statement that permits a student to receive a Direct Loan, or can certify a loan for an amount less than the student would qualify for based on financial need. The school must document the reason for its action and explain the reason in writing to the student.) - establishing a disbursement schedule that accommodates the requirements for multiple disbursements and a 30-day delay for first-year undergraduates who are first-time borrowers. - providing timely and accurate information to the Department regarding all Direct Loan transactions, data concerning a student's status while he or she is in attendance, and any new information the school becomes aware of after the student leaves school. The school must provide this information even if it participates under the alternative loan origination option. - ensure that a school will comply with the Department's requirements to provide Direct Loan information to the Department. - contain a provision stating that a school will accept responsibility and financial liability stemming from its failure to perform its functions under the Agreement. - establish that eligible students (and eligible parent borrowers) can borrow Federal Stafford Loans (and Federal PLUS Loans) and Direct Loans, as long as the student or parent does not receive both Direct and "non-Direct" loans for the same enrollment period. - provide for a quality assurance system, as established by the Department, to ensure that the school complies with Direct Loan Program requirements and meets program objectives. - ensure that the school will not charge fees of any kind to student or parent borrowers for origination activities or for providing information necessary for a student or parent to receive a Direct Loan. - include other provisions the Department deems necessary to protect the interest of the federal government and to promote the purpose of the Direct Loan Program. |