| AwardYear: 1995-1996 ChapterNumber: 4 ChapterTitle: Getting Started: Establishing Direct Loan Eligibility PageNumbers: 1-10 CHAPTER 4 - GETTING STARTED: ESTABLISHING DIRECT LOAN ELIGIBILITY Essential Questions - How does a student apply for a Direct Loan? - Are parents required to be a part of the process? - Where can a student obtain a form? - What does a student do if he/she completed the FAFSA but never heard any result? - Will the student need to complete any supplemental applications for a Direct Loan? - How much can a student receive under Direct Loans and is there a formula for determining how much a student can receive? - Must Direct Loans be prorated? - Can a student receive the same amount if he/she attends one semester instead of two? - What is the aggregate Direct Loan amount? - What is a Direct Unsubsidized Loan? - Does the Direct Unsubsidized Loan have to be awarded before the Direct PLUS Loan? - How much can parents borrow through the Direct PLUS Loan Program? - Does the financial aid office have to track how much a student receives in subsidized, unsubsidized, and additional unsubsidized loans? - What happens if a parent is denied a Direct PLUS Loan? Essential Questions (contd) - Are parents required to go through the Direct PLUS application process if it is obvious they will be denied? - Who is responsible for the parents credit check? - How will schools be notified if a parents credit has been approved or denied? - What is an endorser? General Information Some of the terms and conditions of Direct Loans are very similar to those of the FFEL Program. - Annual and aggregate loan amounts for Subsidized, Unsubsidized, and PLUS loans are the same in both programs; - Proration rules are the same in both programs; and - The amounts of the various types of Direct Loans (subsidized and unsubsidized) are tracked using the Financial Aid Transcript. Consolidation Loans are very different under the Direct Loan and FFEL Program. See the chart on the following page for a summary of selected loan terms. Selected Loan Terms ______________________________________________ Program Annual Aggregate ______________________________________________ Direct Subsidized Loans (dependent and independent): 1995-96 Interest Rate = 8.25% 1st-year undergraduate $2625 2nd-year undergraduate $3500 Subsequent years undergraduate $5500 Total undergraduate (subsidized) $23,000 Graduate/professional $8,500 Total including graduate and undergraduate borrowing (subsidized) $65,500 ______________________________________________ PROGRAM Annual Aggregate ______________________________________________ Base Direct Unsubsidized Loans (dependent and independent): 1995-96 Interest Rate = 8.25% Same amount as above minus Direct Subsidized Loans amount PROGRAM Annual Aggregate ______________________________________________ Additional Direct Unsubsidized Loans (independent only; dependent exception*): 1995-96 Interest Rate = 8.25% 1st-year undergraduate $4000 2nd-year undergraduate $4000 Subsequent years undergraduate $5000 Total undergraduate(dependent - subsidized/unsubsidized) $23,000 Total undergraduate(independent - subsidized/unsubsidized) $46,000 Graduate/professional $10,000 Total including graduate/undergraduate borrowing (subsidized/unsubsidized) $138,000 ______________________________________________ PROGRAM Annual Aggregate ______________________________________________ Direct PLUS Loans (Parents of dependent students): 1995-96 Interest Rate = 9% Any undergraduate year (Eligibility = cost of attendance minus estimated financial assistance) no maximum no maximum *If dependent undergraduates parents are unable to borrow a Direct PLUS Loan, dependent students may borrow up to loan limits of independent students. Determining Eligibility and Loan Amount. The first step in the loan process from the schools perspective is to establish a borrowers eligibility. This process is currently performed for any Title IV program in which the school participates and it includes determining the borrowers loan amount. The general sequence of actions is as follows: - All students applying for Direct Loans complete the Free Application for Federal Student Aid (FAFSA). Students may complete and submit the paper FAFSA or data may be entered through EDExpress. There is no separate Direct Loan application. - Dependent students must also have their parents complete the appropriate sections on the FAFSA. - The Central Processing System (CPS) conducts required database matches and calculates a students Expected Family Contribution (EFC) according to the federal need analysis. - The school receives an electronic report from the CPS, or the student brings a paper output document (Student Aid Report [SAR]) to the school. All EDE options for electronic information exchange for the Title IV programs are available for Direct Loans. - The school uses the EFC as calculated by the CPS or as adjusted by the financial aid administrator. As with other federal Title IV programs, the school must determine the appropriate cost of attendance and estimated financial assistance; then use its normal procedures to determine the student's award package for Direct Loans and for all other types of Title IV student aid. A Direct Loan award may be included in the students award package at the time of initial packaging (and a promissory note sent with the award notification), or the loan may be awarded at a later time, at the student's request. The EDExpress optional packaging module (an operating system function that schools can customize) or another packaging tool (e.g., your current packaging procedures) may be used. - The school notifies the student of the anticipated Direct Loan award amount. The Departments packaging module includes an award letter-generating feature that may be used for this purpose, or the school may choose to use its own notification mechanism. - If the student is selected for verification, appropriate income tax forms must be submitted. If the student is not selected for verification, the school decides whether to require tax forms. - For Direct PLUS Loans, the school may send a Direct PLUS Loan application/promissory note to the students parents, either with the award package notice or upon request. This document requests demographic information and references from the students parents. Samples of the Direct PLUS Loan Application/Promissory Note and instructions are included in the appendices. - A school using the Departments software or other electronic tool that meets Department specifications may preprint or manually complete the student and school sections of the Direct PLUS Loan application/promissory note before sending the form to the applicant. The school may also leave these sections blank for the borrower to complete. - The parent borrower must complete the Direct PLUS Loan application/promissory note and return it to the school. The borrower must complete the loan amount requested, and the school may not loan more than the requested amount, even if the borrower is eligible for more. The parent may not borrow more than the students calculated Cost of Attendance less expected financial assistance. Loan Amounts. Determining loan amounts and tracking annual and aggregate loan amounts are continuing school functions under Direct Loans. Using information from the financial aid transcript and, later, data from the National Student Loan Data System (NSLDS) that will be transmitted through the CPS output, schools are responsible for ensuring that borrowers do not exceed their annual/aggregate limits. The Direct Loan Servicing Center will transmit data to the NSLDS beginning in the fall of 1995. Credit issues for Federal Direct PLUS Loans. The credit check requirement for Direct PLUS Loan parent applicant(s) merits special attention. (Parent references can represent one or both parents.) - After receiving the Direct PLUS Loan origination record, the Servicing Center will transmit the applicant information to a credit bureau and receive the results. - The Direct Loan Servicing Center evaluates the credit report received from the credit bureau to determine if the applicant has an adverse credit history as established by the Direct Loan Program rules. The Direct Loan Program rules are identical to the FFEL Program rules, which provide that a PLUS Loan applicant is rejected if · the applicant is 90 or more days delinquent on any debt as of the date of the credit report; or · during the five years preceding the date of the credit report, the applicant has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt. - For an approved applicant, the Servicing Center transmits the results of the credit check to the school and a Direct PLUS Loan disclosure to the parent applicant (and endorser, if applicable). - If the applicant is rejected, the Servicing Center notifies the parent applicant (and endorser, if applicable) of the reason for the rejection, the name of the credit bureau that supplied the credit data upon which the rejection is based, and an endorser form of resubmission and reevaluation. The rejected applicant then has two options: 1) The parent may document that extenuating circumstances exist (the parent should contact the Servicing Center for assistance), or 2) Obtain an endorser who does not have an adverse credit history. (Endorser information should be sent to the Servicing Center if the borrower still wants the loan.) The parent is asked to notify the school of his/her intentions. · The parent applicant may contact the credit bureau regarding any inaccurate credit information. · The Servicing Center will provide the name and telephone number of someone within the credit organization that the applicant may contact for further assistance. · An endorser is defined as an individual who signs a promissory note and agrees to repay the loan in the event that the borrower does not. - The Servicing Center notifies the school of the applicants credit evaluation within five business days through decision codes in the Direct PLUS Loan origination record. · For Direct PLUS Loan applicants who meet the Department' criteria, a school continues processing the loan. · For applicants who do not meet the Departments credit criteria, a school must stop all loan processing. · If an applicant documents that extenuating circumstances exist, the school and parent are notified of the Departments decision. The school then processes the loan if those circumstances are acceptable. - If an applicant is not approved for a Direct PLUS Loan and elects to reapply with an eligible endorser, the loan process begins again with the endorser submitting an endorser form to the Servicing Center. The school will be notified of the results of the endorsers credit check. - Schools must develop a policy for handling Direct PLUS Loan applicants with adverse credit histories. This is necessary to determine the time frame during which a school will process unsubsidized loans for the dependent student. · If the parent borrower is not eligible to borrow under the Direct PLUS Program due to adverse credit history, the student may borrow additional Direct Unsubsidized Loan funds. · Schools will want to determine whether the parent borrower is seeking approval based on extenuating circumstances, obtaining an endorser, or wishes to cancel the Direct PLUS Loan application. · The borrower may choose not to pursue the Direct PLUS Loan. If so, that loan application must be cancelled before the school may process a Direct Unsubsidized Loan application for the student for remaining eligibility. The Direct Unsubsidized Loan would be initiated only at the students request. - Finally, if a parent borrower presents documentation to the school that the parent will not meet the credit criteria, the dependent student may borrow the additional Direct Unsubsidized Loans. Other regulatory circumstances that allow a dependent student to borrow the additional Direct Unsubsidized Loan include · the parent receives only public assistance or disability benefits · the parent is incarcerated · the parents whereabouts are unknown Implementation Issues and Management Tips The Direct Loan regulations provide the flexibility to assist families who obviously will not meet the credit requirements for Direct PLUS Loans. Schools can develop an internal process for a review of parent circumstances to minimize the number of borrowers who complete the application process unnecessarily. - For example, if a family has already documented through the professional judgment process that the parent has a tax lien, you can decide to award immediately the additional Direct Unsubsidized Loan and bypass the Direct PLUS Loan application process. In determining the students eligibility for loans, you may need to reconsider your packaging philosophy. There is great flexibility in how you package and award loans to a student, and choices to be made about how to use Direct Unsubsidized Loans and Direct PLUS Loans. There are probably many approaches, but here are a few: - Restrict loan amounts to subsidized loans only (may leave unmet need). - Restrict loan amounts to subsidized and unsubsidized only up to established need (may also leave unmet need). - Allow loan amounts to cover unmet need and replace EFC up to the Cost of Attendance. As you determine loan amounts for your students, consider - student loan indebtedness and ability to repay - ability to use professional judgment to reduce a students eligibility - the desire to inform families of their full eligibility and let them make the choice of how much debt is appropriate - if you decide to award applicants up to the Cost of Attendance, keep in mind that an overaward will exist if the student receives any additional resources. As is currently required, schools must be vigilant in monitoring overawards Because there is no requirement for a separate loan application, students will move very quickly through the Direct Loan process by simply completing the FAFSA. Institutions, therefore, may need to consider early in the application process issues related to loan debt and how these issues are communicated to students. TIP - Consider sending a copy of All About Direct Loans to students or developing your own information fact sheet. You may provide this information to students either at the time they complete the FAFSA or when award notifications are sent out. TIP - As you design your loan process, keep in mind that additional data are needed for Direct PLUS Loans. You can choose to develop a procedure to obtain this information early in your delivery plan or at a later point when the Direct PLUS Loan application/promissory note is collected. TIP - If you have developed your own institutional application, or if you require an award letter acceptance to be returned to you before processing a Direct Loan request, you may want to obtain the additional Direct PLUS Loan information through such a process. When you produce the Direct PLUS Loan application/promissory note, this may allow it to be preprinted with more specific information before sending it to the borrower. |