| AwardYear: 1995-1996 ChapterNumber: 6 ChapterTitle: Requesting and Disbursing Funds PageNumbers: 1-22 CHAPTER 6 - REQUESTING AND DISBURSING FUNDS Essential Questions - What is immediate need? - What is the real disbursement date? - How does the disbursement date get into the Direct Loan software? - Can a school exceed its authorization level? - Does the 30-day delay requirement apply? - What is the earliest and latest funds can be disbursed? - What happens if the loan amount changes; how does the change affect a schools drawdown and what action is necessary? - May a school draw down funds for a student for whom it does not have a signed promissory note? - Do schools have to disburse by a check or can the students account be credited? - Who draws down the money and how often? - How does a Level 2 or alternative originating school draw down funds? - How is the drawdown amount calculated? - What if a school draws down too much money, or too little? - If a loan is cancelled after the 120-day period, who pays the fees and how does it show on the loan record/reconciliation report? - Can Direct PLUS Loans be applied to a students account? - If there is money left over from a Direct PLUS Loan, who gets the money and how? - Is parent authorization necessary to apply Direct PLUS Loan funds to the student account? General Information - There is no Direct Loan authorization level as there is in some other financial aid programs. - Direct Loan funding requests may not be combined with other Title IV funding requests. - If a school draws down too much, the funds must be returned as excess cash; if a school draws down insufficient funds and disburses, a deficit spending situation will result for the school. The school should then draw down the amount of the deficit. - If the school chooses to use, or is required to use, an interest-bearing or investment account until the school disburses the funds to students, any interest earned in excess of the $250 annual allowance for administrative expense must be returned to the Department at least annually as part of the EDPMS 272 reporting. A school is not required to maintain an interest-bearing account if one of the following situations applies: - In the prior award year, the school drew down less than $3 million from Title IV programs; or - The school earned less than $250 in interest on the total amount of Title IV funds drawn down in the prior award year; or - For the total amount of Title IV funds that the school draws down during the award year, the school demonstrates by its cash management techniques that the school would not earn over $250 in interest by maintaining the funds in an interest-bearing account. - Disbursement is not permitted without a completed promissory note. - The earliest a student account may be credited or a student may be paid by cash or check is 10 days before the first day of the period of enrollment. There is a 30-day delay for disbursing loans to students who are undergraduates enrolled in the first year of their program who have not previously received an FFEL or Direct Loan. - Multiple disbursements are required, even for partial academic year attendance. - No disbursement can be greater than 50 percent of the loan amount. - Fees of 4 percent are deducted from the schools drawdown and each disbursement; your drawdown is based on net disbursements. - If the disbursement is cancelled within 120 days, the fees are not owed. If the disbursement is cancelled after 120 days, the fees must be paid. If the disbursement is adjusted downward within 120 days, the fees are owed only on the portion of the disbursement the student receives. - For schools with a student accounts receivable system, the disbursement date is the date funds are credited to the student account. - For schools without a student accounts receivable system, the disbursement date is - the date the check is made available to the borrower; - the date the check is given to the student; or - the date the school initiates an electronic funds transfer (EFT) to a bank account designated by a student or parent borrower. - Schools are permitted to apply a Direct PLUS Loan credit to a students account without a specific authorization from the parent. There is language in the prom note that gives schools permission to do this. If there is money remaining after allowable institution charges are paid, the funds must go to the parent unless the parent has provided written authorization allowing you to give payment to the student. LEVEL 1 ORIGINATING SCHOOLS. On an ongoing basis, a Level 1 originating school estimates the amount of funds that will be needed to make anticipated Direct Loan disbursements (net of loan fees). To make this estimate, the school - uses the Direct Loan software or similar system and a variety of selection criteria. When a borrowers record is ready (that is, when the origination record is created and the completed, signed promissory note has been obtained), the software flags the record as eligible for payment. Note: Receipt of the completed, signed promissory note (before determining that the borrowers loan amount is eligible to be included in a drawdown request) is optional for originating schools, but the school will be at risk for liability if disbursements are made before the promissory note is received. Although the anticipated disbursement date may have passed for a particular borrower, the software will include the anticipated disbursement amount in any calculations that estimate the schools cash needs if - the record has not been included in a previous request; - the record is flagged as eligible for payment; - the anticipated disbursement has not yet been made; and - the parameters set by the school to select eligible records include the borrowers anticipated disbursement date. The schools estimate also - may increase or decrease the system-calculated amount of funds required based on historical anticipated need - includes Direct Subsidized and Unsubsidized Loans and Direct PLUS Loans - considers Direct Loan funds on hand Based on this comparison, the school - requests funds to meet its needs, minus any cash available; or - returns undisbursed funds (that will not be disbursed in the next three days to the Department, if the school has an excess of funds and does not anticipate needing the funds). Other fund request requirements: - The school must use all funds on hand to meet immediate need. - The school is authorized to draw down Direct Loan funds using the Education Departments Payment Management System (EDPMS). - For Level 1 schools only, the drawdown of funds is not dependent on the submission to the Servicing Center of an individual borrowers loan record and/or promissory note. - A signed, completed, accurate promissory note is required before a loan is disbursed. TIMING REQUESTS FOR DIRECT LOAN FUNDS. The three-day guidelines for immediate need govern the point at which a school actually makes the request for cash. Immediate need has been defined by the Department as a period that is as soon as administratively feasible but no later than three business days following the date the school received the funds using either ACH/EFT or FEDWIRE. Immediate need differs from school to school. However, a school should consider these basic factors in formulating a request: - the balance of Direct Loan cash on hand - anticipated disbursements - anticipated fund recoveries By determining when cash is needed and backtracking to accommodate the various parts in the process, the school can predict when to initiate the request. The following chart displays approximate timelines for receipt of funds for schools using the ACH/EFT method. To distinguish between morning and afternoon, the daily cutoff is 3:30 p.m. Eastern time. Timeline For Requesting/Receiving Direct Loan Funds Using ACH/EFT Funds Requested Funds Received Monday morning Wednesday or Thursday Monday afternoon/Tuesday morning Thursday or Friday Tuesday afternoon/Wednesday morning Friday or Monday Wednesday afternoon/Thursday morning Monday or Tuesday Thursday afternoon/Friday morning Tuesday or Wednesday Friday afternoon/Monday morning Wednesday or Thursday Note: Afternoon begins at 3:30 p.m., Eastern time. STEPS IN REQUESTING DIRECT LOAN FUNDS. Once the schools immediate cash needs have been determined, the following steps must occur: - The school transmits an electronic payment request for Direct Loan funds only using - the Direct Loan software; - the telephone--by speaking with a service bureau representative or by using the touch tone telephone keys to enter the request; or - the FEDWIRE software if the school receives funds via FEDWIRE. - The security levels in the Direct Loan software allow schools flexibility to authorize certain personnel to make funding requests, but not to perform other types of functions, such as loan origination or importing/exporting records. - The EDPMS service bureau processes a schools drawdown request. - The service bureau checks that the account type, PIN number, and password identifiers are valid. - If any identifiers are invalid, the school is notified to correct the error. - Valid requests are batched and sent daily to EDPMS for further processing. - Drawdown requests are edited, batched, and an ACH/EFT payment file is created for transmittal to the Federal Reserve Bank (FRB). - Problem requests are transferred to a holding file. - Department personnel review the holding file daily and either approve the transaction or contact the school to resolve the problem. - The FRB receives the ACH/EFT file and transfers funds to the schools bank account. - Direct Loan funds may be deposited in the same account with other Title IV funds. However, schools must be able to separately account for those funds. - The FRB notifies the Department if an ACH/EFT transmission or a schools transaction is rejected. - ACH/EFT transmissions may be rejected because of mechanical difficulties or because a schools designated bank account has changed. - If the ACH/EFT transmission is rejected, the Department contacts the school to resolve the problem. - A schools bank should receive funds within 48 to 72 hours after the school transmits the drawdown request, depending on the time of day the request was sent. LEVEL 2 ORIGINATING SCHOOLS AND ALTERNATIVE ORIGINATING SCHOOLS. A Level 2 originating school and a school using the alternative originator services provided by the Departments Servicing Center follow a different procedure to receive Direct Loan funds than a Level 1 originating school. Funding requests are initiated by the Servicing Center on the basis of records and promissory notes submitted by the school. Schools send loan origination records and promissory notes to the Servicing Center. The Servicing Center must receive and accept these records. Approximately 30 to 45 days before the anticipated disbursement dates in the loan origination record, the Servicing Center will send an electronic anticipated disbursement list advising the school of the anticipated disbursements by borrower and loan type. - The school reviews the list for any updates or adjustments to the information, particularly the disbursement amounts and anticipated disbursement dates. - The school sends any updates and changes to the Servicing Center. The Servicing Center will request funds for the school based on the anticipated disbursement dates provided by the school. - The Servicing Centers request for funds will be made three to six days before the anticipated disbursement dates. - The Servicing Center will simultaneously create and send an actual disbursement roster to the school reflecting the individual borrowers, loan types, and their associated actual disbursements, as well as the total amount of funds in the request. - The funds will be sent to the schools bank through the Automated Clearinghouse (ACH). The timeline below illustrates the disbursement process for Level 2 and alternative originating schools. Disbursement Timeline Alternative Originating Schools 30-45 days before disbursement: Servicing Center sends school anticipated disbursement list; school returns updates/changes to Servicing Center 6 days before disbursement: Serving Center requests funds and sends actual disbursement roster to school Disbursement date: School disburses funds Note: If the school sends the origination record or promissory note 15 days (or less) before the anticipated disbursement date, the disbursement may not appear on the anticipated disbursement listing. However, the Servicing Center will request funds for this loan 3 to 6 days before the anticipated disbursement date, if the origination record and promissory note are accepted by the Servicing Center. DISBURSING FUNDS TO BORROWERS. Schools disburse Direct Loan funds in a manner similar to the delivery of loan proceeds under the FFEL Program. The difference is that the school controls--within the limits of the regulations--WHEN the students receive the funds, just as the school now does under the Federal Pell Grant and federal campus-based programs. The following steps must be taken to disburse funds: - The school establishes disbursement dates, taking into account the requirements concerning the number, amount, and timing of the disbursements. - The school verifies that a student maintains eligibility for the loan. This eligibility determination is the same as the requirement for schools under the FFEL Program. - The school (or the alternative originator for Level 2 and alternative originating schools) must have a signed, completed promissory note from the borrower before disbursement. - The school may apply Direct Loan proceeds to the students account without separate written authorization, or acknowledgment, from the borrower. Checks are not required to be issued. - If a school has a student accounts receivable system, the law requires that the loan funds be posted directly to a borrowers account for tuition and fees and room and board (if the borrower contracts with the school for room and board). - With authorization from the student, funds also may be credited to the students account for other Cost of Attendance charges owed to the school by the student and other institutional charges that the student incurs at his or her discretion.. - If the students account shows a balance remaining, a check or similar instrument requiring the endorsement of the borrower must be issued to the borrower within 21 days or whichever is latest: the date the balance occurs, the first day of classes of the period of enrollment, or the date the borrower rescinds his or her authorization to use the excess funds to cover other expenses or to hold excess funds for a student. (The student can also be paid in cash.) - Schools unaccustomed to issuing checks may wish to issue a check (or similar instrument) that includes proceeds for all Title IV programs (such as Federal Pell Grant and Federal Direct Subsidized Loans) that are not needed for institutional charges. - Direct Loan borrowers are subject to standard disbursement requirements, such as the 30-day delay for first-year, first-time borrowers. The school is not required to provide any anticipated disbursement notification to the borrower. The school must notify the student or parent borrower in writing (e.g., through the monthly statement) when funds have been credited to the students account. No notification is required if all funds are paid to the borrower via check or cash. - The prom note informs of the borrower of the anticipated disbursement dates. - Upon receipt of the borrowers disbursement record from the school, the Servicing Center confirms with the borrower that a disbursement has occurred and that the loan has been booked. - The date funds are paid to the borrower is the disbursement date. This is the earliest of - the date the school credits the students account with actual funds; - the date the check (or cash) is made available to the borrower; or - the date an electronic funds transfer to the borrowers account is initiated. SPECIAL DIRECT PLUS LOAN CONSIDERATIONS. - Schools are encouraged to post Direct PLUS Loan funds directly to a students account for tuition and fees and room and board (if the student contracts with the school for room and board). With authorization from the parent borrower funds also may be credited to the students account for other Cost of Attendance charges owed to the school by the student and other institutional charges the student incurs at his or her discretion. - If the students account shows a balance remaining, the school must either issue a check to the parent borrower or obtain authorization from the parent borrower to issue a check or similar instrument of endorsement to the student. REPORTING DISBURSEMENTS. After disbursing funds, the school must report the required information on actual disbursements to the Departments Servicing Center. Note: Actual disbursement data are reported ELECTRONICALLY to the Servicing Center, while the promissory notes are mailed to the Servicing Center. Even if a school sends both sets of information simultaneously, the disbursement record will arrive first. No loan is booked (thereby relieving the school of liability for drawdown funds) until the Servicing Center has all of the following: - Complete loan origination record; - Signed, complete promissory note; and - Complete first disbursement record. - The reporting procedure varies according to the schools origination category. LEVEL 1 ORIGINATING INSTITUTIONS - The school records the actual disbursement date and amount of each disbursement in the Direct Loan software provided by the department or in another system maintained by the school. - Disbursement records must be transmitted by the school to the Servicing Center as soon as possible but no later than 25 days after the end of the month the disbursement was made. - Funds drawn down for one eligible borrower may be disbursed to another eligible borrower. LEVEL 2 AND ALTERNATIVE ORIGINATING INSTITUTIONS - As noted earlier, a Level 2 or an alternative originating school will receive a disbursement roster from the Direct Loan Servicing Center indicating the borrower, loan type, and amount to be disbursed. - The school must verify or correct the disbursement amount for each borrower, record the date and amount of each disbursement in the Direct Loan software or other system maintained by the school, and electronically transmit disbursement records to the Servicing Center. - If the school disburses an amount less than anticipated, the school must send the excess cash back to the Servicing Center within a week of receipt of funds. - Funds may be disbursed only to the borrower for whom they were drawn down. SERVICER RESPONSE AND ACTIONS - The Servicing Center receives and processes the disbursement records sent by the school. Each disbursement record is matched to a borrower/loan record and edited against other data such as loan amount and borrower status. Electronic disbursement records are edited and validated within one business day. - If the disbursement record passes the edits, the borrower/loan record is updated and the loan is booked, if the Servicing Center has received the loan origination record and promissory note. - If there is a problem with the disbursement record, the Servicing Center notifies the school (via the acknowledgment record) to resolve the problem. After the loan is booked, the Servicing Center produces a letter within 10 business days to notify the borrower of the disbursement and to redisclose the terms of the loan. The borrower is provided with a contact and a toll-free number at the Servicing Center to discuss his/her loan. After the borrower receives this notification, he or she contacts the Servicing Center directly with any questions, concerns, or additional information needs. - The Servicing Center matches second and subsequent disbursements against the specific loan record for the borrower previously established in its data base. DISBURSEMENT CANCELLATIONS occur when, within 120 days of the disbursement date - the school determines the disbursement should not have been made; - the borrower does not accept the entire amount of the disbursement; - the borrower returns all the funds; or - there is a Title IV refund that would result in a refund of the total amount disbursed. - ADJUSTMENTS occur when, within 120 days of the disbursement date - a borrowers eligibility changes; or - a mistake is made on the amount disbursed; or - there is a Title IV refund that is less than the full amount disbursed. - A Payment is any loan payment, made 121 days or more after the date of the disbursement, to the Servicing Center before a borrower enters repayment. Prepayments (payments made before the borrower enters the repayment period) are normally made by the borrower, but funds may be transmitted by the school if the school wishes to make the payment on behalf of the borrower. The following chart summarizes these adjustment provisions. Direct Loan Cancellations, Adjustments, and Payments _______________________________________________________ Disbursement Cancellations* _______________________________________________________ A disbursement cancellation is the return of the total disbursement amount received by the borrower, by either the school or the borrower, within 120 days of the disbursement date. Events that would create a DISBURSEMENT CANCELLATION include: - The school determines that the disbursement should not have been made. - The borrower does not accept the disbursement. - The borrower returns to the school all funds that have been disbursed. - There is a refund due under the Title IV refund policy which would result in a refund of the total amount disbursed. An originating school returns cancelled funds to its federal account when the school has determined or has knowledge that an event listed above has happened. Excess funds are to be returned to the Department. An alternative originating school returns the cancelled funds to the Department. All schools send disbursement and cancellation records to the Servicing Center. THE BORROWER IS NOT RESPONSIBLE FOR THE LOAN FEES AND ACCRUED INTEREST FOR A CANCELLED DISBURSEMENT. _________________________________________________________ Disbursement Adjustment* _________________________________________________________ A disbursement adjustment is the return of a portion of the amount of a disbursement within 120 days of the disbursement date. Events that would create an ADJUSTMENT include: - A disbursement amount was originally input incorrectly and must be corrected. - A reduction in the amount of the students eligibility requiring a downward adjustment to a disbursement. - A refund is due under the Title IV refund policy which is less than the full amount of the disbursement. Other than to correct a data error, if an originating school adjusts a disbursement downward, it returns the net adjustment amount (the amount received back from the borrower) to the federal account. Excess funds must be returned to the Department. An alternative originating school returns the net adjustment amount to the Department. All schools send disbursement adjustment records reflecting the adjustment to the Servicing Center. THE BORROWER IS RESPONSIBLE FOR LOAN FEES AND ACCRUED INTEREST ONLY ON THE TOTAL ADJUSTED AMOUNT OF THE DISBURSEMENT. _________________________________________________________ Payment of a Loan Balance** _________________________________________________________ A partial or total disbursement returned for any reason, by either the school or the borrower, 121 days or more after the date of the disbursement does not reduce the loan amount borrowed. Rather, the payment is applied to the borrowers account just like any regular payment. If a payment must be made, the school or borrower must send a check to the Servicing Center with the appropriate information needed to apply the amount to the borrowers account. The Servicing Center, upon receipt of the check, will apply the payment amount to late charges and collection costs and outstanding interest before crediting it to the principal balance. The borrower is responsible for the loan fees and any accrued interest on the original amount of the loan. _________________________________________________________ * Within 120 days of the disbursement date. ** After the 120-day cancellation/adjustment period. IMPLEMENTATION ISSUES AND MANAGEMENT TIPS To determine when it is appropriate to draw down funds, you may want to consider first whether you will disburse before or after federal funds are received. In other words, is your campus willing to allow you to disburse funds to students before actual receipt of federal funds, which may put an account in the red (sometimes referred to as deficit spending) or to use institutional funds while awaiting your federal monies? Consider the following possibilities: - If you disburse before receipt of federal funds, your disbursement date will be earlier than the date federal funds are received. The disbursement date is still the date you are either paying the student or crediting the account whether it is with federal funds or not, and the school is asking if these deficits can be covered. - If you disburse after receipt of federal funds, you are saying you dont accept deficit spending. Funds will be disbursed only after funds are received; therefore, your disbursement date is the date the federal funds are transferred to the students account. To determine when you will draw down funds, establish your disbursement date first. In doing so, remember the disbursement requirements. Use the time line on the following page by entering any dates you wish that are appropriate for your school. There may be a number of other important dates you should consider, including - your bill due date(s) - the date your bills are mailed - the end of your drop/add period --------------------------------------------------------------- 21 days 10 days 1st day of school 30-day delay 45 days __________________________________________________________ Be aware that if your school maintains Title IV funds in an interest-bearing or investment account, interest earned during the three-day period in excess of the $250 annual allowance for administrative expense must be returned to the federal government through the EDPMS 272 report process. Interest starts when you get the money--spend quickly. TIP - Assess the timeframe it takes for you to draw down funds and spend them within three days. Evaluate the results and determine if adjustments are needed. TIP - Alternative originating schools can control the frequency and timing of receiving drawdowns requested by the Servicing Center through the anticipated disbursement dates. TIP - Chart the amounts of money you are drawing down and spending, especially during the beginning of your term. This will help you project future cash needs. TIP - Calculate your need for funds and export that data to the EDPMS Service Bureau early enough in the day to meet the 3:30 P.M. cutoff. If you use the Direct Loan software to calculate your drawdown request, consider that the amount will be based on all loan origination records with a certain anticipated disbursement date. You have the option to manually override this amount by either increasing or decreasing it. For example: TIP - You might increase the amount requested because you know that you will receive more signed promissory notes before the funds are received. You will want to be conservative when increasing the amount requested so you do not create an excess cash problem. TIP - You might decrease the amount requested, especially if you know from experience that not all your students will maintain eligibility for the loan at the time of disbursement. You have additional considerations when manually overriding the softwares drawdown request. If you adjust the amount downward, the software does not know which students were excluded; it records all loans with a specific anticipated disbursement as included in that drawdown request and will not add them to future drawdown calculations. If you intend to disburse some of these loans at a later date, you will need to include them by subsequent manual override(s). TIP - Monitor excess cash daily. New cash management regulations, effective July 1, 1995, were published December 1, 1994 in the Federal Register. Therefore, you may want to evaluate and assess the current process of funds drawdown on your campus. You now have available software that can determine the amount of funds you need. Given that, should the drawdown be conducted by the financial aid office? By your accounting department? By contracts and grants? By your bursar? By other offices? TIP - Reexamine how information flows between the financial aid, bursar, and business offices. With the increased volume of Direct Loans funds, the new cash management regulations, and the need to meet strict time requirements in drawdowns and excess cash calculations, the process at your school may need to be streamlined and reengineered. TIP - If Direct Loan funds are to be drawn down by an office other than the financial aid office, remember to set up your Direct Loan security access accordingly. (See the description of software security levels in Chapter 2.) Student money management and budgeting behavior may change as a result of Direct Loans being applied to the student account. Some students have been accustomed to using their student loan check for start-up costs until other funds are available. This may have resulted in a later payment of school charges. When the Direct Loan is applied to their accounts, students may need to plan differently for how they will cover their educationally related expenses. The following chart may help you inform your students about Direct Loan disbursements. DISBURSEMENT DECISION CHART A. DOES THE SCHOOL HAVE A STUDENT ACCOUNTS SYSTEM? NO - Loan proceeds must be given to the borrower in cash or check for form. The date the check is made available to the borrower is the disbursement date; it can be no earlier than 10 days prior to the beginning of the enrollment period. The school must make a reasonable effort to deliver proceeds within 45 days. YES - Determine action by answering the following questions: A1. DOES THE LOAN CREDIT EXCEED REQUIRED CHARGES? IF NO: No further action is necessary. IF YES: A2: Do you have borrower authorization to cover unauthorized costs? IF answer to A2 is YES: Apply credit to outstanding charges. IF answer to A2 is NO: Secure borrower authorization or refund credit balance to borrower within 45 days. B. DOES THE ACCOUNT HAVE A CREDIT BALANCE? If answer to (B) is YES: Refund balance to borrower within 45 days. If answer to (B) is NO: No further action is necessary. TIP - You may wish to prepare your students for this change before school starts by including information on the Direct Loan disbursement process at your institution and offering other funding alternatives to students (such as interest-free loans). TIP - If a disbursement is cancelled after 120 days, the school must determine whether the school or the borrower will pay the fee. Consider developing a policy to assist in making this determination so that borrowers are treated fairly and equitably. ADDITIONAL DIRECT PLUS CONSIDERATIONS. On the Direct PLUS Loan refund issue, consider the following options: - Obtain an authorization from the parent at the time the Direct PLUS application/promissory note is received, allowing you to give excess funds to the student. - Incorporate the Direct PLUS authorization into the schools institutional application (completion of the authorization would, of course, be clearly optional). - Modify your student accounts receivable system to allow you to create and mail Direct PLUS Loan refund checks to the parent. TIP - In the event that applying funds to a students account results in a credit balance, schools that disburse funds in a specific order will be able to determine which funds produced the credit balance. - For example, a school may first apply Direct PLUS Loan funds to a students account and then apply other types of financial aid funds. If the students charges exceeded the Direct PLUS Loan amount, any resulting credit balance after applying other financial aid would not be attributed to the Direct PLUS Loan, making a parent authorization unnecessary. Applying Direct PLUS Loan funds to the student account first may minimize the number of Direct PLUS Loan credit balance checks you will have to create. To accommodate this situation, it may be necessary to delay the disbursement of other aid. |