Bulletin ID
DLB - 95 - 9
| PublicationDate: 6/1/95 BulletinID: DLB - 95 - 9 June 1995 DLB-9 Summary: Questions and Answers concerning procedures and policies under the William D. Ford Federal Direct Loan (Direct Loan) Program Dear Colleague, Attached are Direct Loan Questions and Answers that we hope will clarify some of the issues that schools have raised. We will send additional Q&A's as the need arises. All Q&A's will be available on the Direct Loan Bulletin Board. During the recent Direct Loan videoconference, we promised to include information concerning the UCC-1 statement that institutions are required to file with a State or municipal government entity. We understand that institutions have numerous questions concerning the use of this form. Unfortunately, we are unable to provide comprehensive information regarding this form in this document. However, the Department will provide information regarding the form to all Title IV schools in the near future. We hope you will find this material helpful. If you have any questions or concerns regarding these Q&A's, please call the Direct Loan Policy Staff at (202) 708-9406. Sincerely, Diane Voigt, Chair Direct Loan Task Force Loan Limits 1. If a student has previously received an undergraduate degree and a graduate degree and then returns for a second undergraduate degree, how is the student's aggregate loan amount determined? William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program loans that the returning student previously received as an undergraduate must be totaled to determine the student's remaining eligibility for undergraduate loans. If this total does not exceed the undergraduate loan limits, the returning student is eligible to receive additional funds up to the undergraduate loan limit. The loans the student received as a graduate student would not be counted towards the student's aggregate undergraduate loan amount. However, amounts awarded for undergraduate and graduate study may never exceed the total allowable aggregate loan limits. 2. How will Direct Loan schools track aggregate loan amounts? When the National Student Loan Database System (NSLDS) is fully operational and schools are able to access it, NSLDS will track aggregate loan amounts. Until that time, schools will be required to track aggregate amounts based on institutional records and financial aid transcripts. Promissory Note Issues 3. When is the last date a school can "certify" a borrower's eligibility for a Direct Loan? A school may not originate a Direct Loan (i.e., transmit an origination record) for a student after the loan period has ended or after the student has ceased to be enrolled on at least a half-time basis. This requirement is comparable to the FFEL requirement that schools certify the borrower's loan while the student is enrolled on at least a half-time basis. 4. Can a person with the power of attorney for a borrower sign a Direct Loan promissory note? Yes. However, if the individual with the power of attorney signs the promissory note, the school must obtain written authorization from the borrower to apply the loan proceeds directly to the borrower's account at the school. If there are any remaining proceeds, the school must provide excess funds to the borrower by check or other means requiring the borrower's endorsement or authorization. 5. Under what circumstances does a school need to complete an addendum for Year One? If a Year One school initiates a loan using Year One software (1994-95), and the first disbursement occurs on or after July 1, 1995, the school needs an addendum for that loan. If an addendum is not received, that disbursement will be rejected. 6. If a school wants to print its own bar code on a promissory note, where does the Department recommend that the school print it? Schools may put their bar code on the top of the promissory note, along the side, or on the back of the promissory note. Schools cannot print the bar code at the bottom of the page because that is reserved for the bar code printed by the Department. They also cannot print it in the Loan Identification Number(s) block since that interferes with imaging the document. Satisfactory Repayment Arrangements 7. What is the process for verifying that defaulted borrowers have made satisfactory repayment arrangements? In regard to both student and parent borrowers who have defaulted on a Title IV loan, the institution must obtain a written statement from the holder of the defaulted loan that the borrower has made satisfactory payment arrangements (that is, six consecutive, voluntary, on-time, reasonable and affordable, full monthly payments) prior to disbursing student aid funds. 8. How often must schools verify that the defaulted borrower continues to make payments. Once the school has verified that the borrower has made satisfactory repayment arrangements prior to disbursing additional student aid, the school need not verify the borrower's status again for that loan period. If the defaulted borrower does not continue to make payments on the loan and the borrower applies for subsequent aid, the Central Processing System (CPS), which obtains updated information from NSLDS, should indicate that the borrower has defaulted. A borrower can regain eligibility under satisfactory repayment arrangements only once. If the reinstated borrower does not continue making payments and goes back into default, the borrower loses Title IV eligibility until he or she repays the defaulted loan in full. Bankruptcy Reform Act 9. How did the Bankruptcy Reform Act affect the Direct Loan Program? First, the Bankruptcy Reform Act of 1994, P.L, 103-394, prohibits denial of a loan or loan guarantee based on the fact that the borrower was a debtor or bankrupt under the Bankruptcy Act. Based on this change, the Secretary eliminated a previous requirement that a borrower reaffirm a loan that had been discharged in bankruptcy as a prerequisite to further eligibility to participate in the Direct Loan Program. However, for PLUS applicants the Bankruptcy Reform Act does not prohibit consideration of the discharge in determining the future creditworthiness of a loan applicant. Consistent with this new law, the Direct Loan regulations provide that a bankruptcy discharge within the past five years evidences an adverse credit history, as a result of which the PLUS Loan applicant must provide documentation of extenuating circumstances or secure a credit-worthy endorser. In the near future, the Department will issue to all schools a "Dear Colleague Letter" concerning the treatment of bankruptcy. This document will address the Bankruptcy Reform Act's impact on all Title IV Programs. 10. If the financial aid administrator finds that the parent has a bankruptcy on record, may the financial aid administrator approve the student on whose behalf the parent is borrowing for additional Unsubsidized Loan eligibility? Or is the PLUS applicant required to find an endorser? The PLUS applicant may but is not required to furnish an explanation of the bankruptcy to the Secretary. Similarly, the applicant may but is not required to secure a credit-worthy endorser. If the PLUS applicant does not wish to pursue either of these routes, the parent will be precluded from borrowing. Because the parent will be denied a PLUS loan, the financial aid administrator may certify the student on whose behalf the parent is borrowing for additional Unsubsidized Loan eligibility without sending an origination record to the Servicer for an official credit decision. Improving America's Schools Act 11. What was the impact of the Improving America's Schools Act on the Direct Loan Program? The Improving America's Schools Act (IASA) of 1994 amended the Higher Education Act in the following areas: Deferments: Under the IASA, a Direct Loan borrower who has an outstanding balance on an FFEL Program loan made prior to July 1, 1993 at the time the borrower applies for a Direct Loan is eligible for any deferment available to a similar FFEL borrower who has a prior FFEL loan made before July 1, 1993 (the "old" FFEL deferments). As in FFEL, a PLUS-only borrower is not eligible for old deferments that were available only to student loan borrowers. Time limits on deferments on a Direct Loan will apply from the time the borrower receives a Direct Loan. Therefore, on the borrower's Direct Loan, the borrower will be eligible for the maximum time period available under each deferment category for which the borrower is eligible, regardless of the amount of time the borrower may have been in deferment under the FFEL Program. However, there will be no extension of deferment time limits on a borrower's existing FFEL Program loans. The IASA also expanded the definition of an economic hardship deferment. The definition now includes a borrower who works full time and has an educational debt burden equal to or greater than 20 percent of the borrower's adjusted gross income (AGI), and the difference between the borrower's AGI and the educational debt burden is less than 220 percent of the greater of the annual earnings of an individual earning the minimum wage or the poverty line for a family of two. New Loans eligible for Consolidation: The IASA establishes that loans under subpart II of part B of title VIII of the Public Health Service Act (that is, nursing loans) will be eligible for Direct Loan and FFEL Program consolidation. Program Names: Under the IASA, the program formerly known as the "Federal Direct Student Loan Program" was renamed the "William D. Ford Federal Direct Loan Program. Also, the "Federal Direct Stafford Loan Program and the "Federal Direct Unsubsidized Stafford Loan Program" were renamed the "Federal Direct Stafford/Ford Loan Program" and the "Federal Direct Unsubsidized Stafford/Ford Loan Program," respectively. The William D. Ford Federal Direct Loan Program will continue to be referred to as the "Direct Loan Program" in regulatory and subregulatory documents issued by the Department. Loans made under the Federal Direct Stafford/Ford Loan Program and the Federal Direct Unsubsidized Stafford/Ford Loan Program will continue to be referred to as Direct Subsidized and Direct Unsubsidized Loans. Consolidation 12. Which HHS Loans are eligible for consolidation? The following HHS Loans may be consolidated under the Direct Consolidation Loan Program: Health Education Assistance Loans (HEAL) Health Professions Student Loans (HPSL) Loans for Disadvantaged Students (LDS) Nursing Loans Primary Care Loans cannot be consolidated under the Direct Consolidation Loan Program. Interest Rates 13. Is it true that after July 1, 1995, all Direct Loans will have an annual interest rate equal to the bond equivalent rate of the 91-day Treasury bills (auctioned at the final auction held prior to June 1) plus 2.5 percentage points during in-school, grace, and deferment periods? No. Only Direct Subsidized and Direct Unsubsidized Loans and Direct Subsidized and Direct Unsubsidized Consolidation Loans disbursed on or after July 1, 1995 will have this interest rate during in-school, grace, and deferment periods. All Direct Loans disbursed before this date will continue to have an interest rate equal to the bond equivalent rate of the 91-day Treasury bills (auctioned at the final auction held prior to June 1) plus 3.1 percentage points during the in-school, grace, and deferment periods. The latter interest rate formula continues to apply to all Direct Subsidized and Direct Unsubsidized Loans and to all Direct Subsidized and Direct Unsubsidized Consolidation loans during the repayment period. PLUS issues 14. If one parent is turned down for a PLUS loan, must the other apply before the student is eligible for additional Unsubsidized loan amounts? No. For both the Direct Loan and FFEL Programs, only one parent need apply for a PLUS loan. 15. Are stepparents eligible for Direct PLUS Loans? In order to obtain a Direct or FFEL PLUS Loan, an applicant must qualify as a "parent" under the definition in the Student Assistance General Provisions regulations. In these regulations, a "parent" is defined as a student's natural or adoptive mother or father, or as a student's legal guardian. Although a stepparent who does not meet the criteria in this definition may not borrow a PLUS loan under the Direct Loan or FFEL Program, this stepparent may be eligible to serve as an endorser for a Direct or FFEL PLUS loan. The Department understands that this regulation may have caused difficulties for some potential borrowers. Therefore, the Department is considering changing the regulations to allow stepparents to borrow under the Direct or FFEL PLUS Loans Programs. Participation Issues 16. Can a Direct Loan school opt not to participate in the Direct PLUS Loan Program, even if the school does not participate in the FFEL PLUS Program. And is a school's non-participation in PLUS an acceptable reason to award a dependent student the "additional" Direct Unsubsidized Loan amount? The answer to both questions is "yes". Direct Loan schools can opt to participate in the Direct Subsidized and Direct Unsubsidized Loan Programs only. This policy is consistent with the FFEL Program; FFEL schools can choose not to participate in the FFEL PLUS Loan Program. A school's non-participation in PLUS is an acceptable reason to award a dependent student the "additional" Direct Unsubsidized amount. 17. Can a Direct Loan school choose to participate in the Direct Subsidized Loan Program and not in the Direct Unsubsidized Loan Program? No. The law requires that both types of student loans be available to all eligible students at participating institutions. Administrative Fees 18. What will the administrative fee be for schools originating loans under the Direct Loan Program in 1995-1996? The administrative fee (called Payment for Origination Services or POS) for 1995-1996 will be $10 per borrower for Level 1 schools and $7 per borrower for Level 2 schools. These payments will be based on reconciled first disbursement records. Level 3 schools (those that use an alternative originator) receive no administrative fee. |