Bulletin ID
DLB - 96 - 2
| PublicationDate: 2/1/96 BulletinID: DLB - 96 - 2 February 1996 DLB-2 Summary: Questions and Answers concerning procedures and policies under the William D. Ford Federal Direct Loan (Direct Loan) Program Dear Colleague, We appreciate your continued support of the Direct Loan Program. In an effort to provide you with assistance in administering this program, we are sending 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. 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 CONSOLIDATION ISSUES 1. Can borrowers consolidate loans while they are still in school and before any of their loans enter repayment? If so, what loans can be consolidated during the in-school period, and what are the advantages to obtaining an "in-school" consolidation loan? Beginning this spring, borrowers may consolidate loans while they are still in school and before any of their loans enter repayment. Only William D. Ford Federal Direct Loans (Direct Loans) and Federal Family Education Loan (FFEL) Program loans can be consolidated during an in-school period. An in-school consolidation loan provides several important benefits to students and schools. For example, when they leave school or drop below half-time status, students will have a six-month grace period on their in-school Direct Consolidation Loans. Further, because the Department is the only lender, students who consolidate all their loans while they are in school will no longer have to notify multiple lenders concerning any changes in their enrollment status. While any additional Direct Loans a student receives will not automatically be added to the Direct Consolidation Loan, the student will continue to receive one Direct Loan bill for all of his or her loans and will make one monthly payment. 2. Do borrowers lose their grace period if they consolidate before their loans enter repayment? As long as at least one loan is still in an in-school status and the borrower's consolidation application is received while the borrower is still in school, the borrower will receive a six-month grace period on the Direct Consolidation Loan. Note that the in-school status refers to loans that have not yet entered the grace or the repayment periods and should not be confused with the in-school deferment. Borrowers whose loans have entered the repayment period but who return to school on at least a half-time basis may receive an in-school deferment. On Direct Consolidation Loans that do not include any loans that are still in an in-school status (that is, Direct Consolidation Loans that include only loans in the grace or repayment periods), the borrower does not receive a six-month grace period. The repayment period begins on the day the Direct Consolidation Loan is made. To avoid losing time on their grace period, borrowers should apply for a Direct Consolidation Loan at the end of their grace period. ELIGIBILITY ISSUES 3. If the school disbursed funds to a borrower who is ineligible to receive a Direct Loan disbursement because the student withdrew or was expelled prior to the first day of classes or failed to attend during that period, is the school or the borrower responsible for returning the money to the Department? The school must return to the Loan Origination Center any loan proceeds credited by the school to the student's account and the amount of payments made by the borrower to the school, to the extent that these payments do not exceed the amount of any loan proceeds disbursed by the school to the borrower. In addition, the school should notify the Servicing Center of the amount given to the borrower (or student, in the case of a Direct PLUS Loan). The Department will send a letter to the borrower requiring the return of any funds that were disbursed directly to the borrower. [See 34 CFR 685.303(b)(3) and 685.211(d)]. 4. If borrowers with defaulted loans regain Title IV eligibility by making satisfactory repayment arrangements or by consolidating their defaulted loans, do they regain eligibility retroactively to the beginning of the loan period or retroactively to the beginning of the term? Borrowers regain eligibility retroactively to the beginning of the loan period. 5. What procedures should a school follow in order to originate a loan for a borrower who has received a prior total and permanent disability cancellation? The school must require the borrower to obtain a physician's certification that the borrower can engage in substantial gainful activity [see 34 CFR 685.200(a)(iv)(A)]. In addition, the school must require the borrower to sign a statement acknowledging that the Direct Loan he or she receives cannot be canceled in the future on the basis of any impairment present when the new loan is made, unless that impairment substantially deteriorates [see 34 CFR 685.200(a)(iv)(B)]. The physician's and borrower's certifications should be mailed to the Loan Origination Center, along with the promissory note; the school should also retain copies of these certifications in the student's file. Once schools have the required documentation, they can originate a new loan. The Department does not plan to develop forms for schools to use for the purpose of originating loans for borrowers who have received a prior total and permanent disability cancellation. Schools may, but are not required to, develop their own forms and should refer to the regulatory language cited above when developing statements for students or physicians to sign. Schools that choose not to develop forms must simply ensure that the signed statements they receive from borrowers and physicians satisfy the regulatory requirements. LOAN LIMITS AND INTEREST ISSUES 6. If interest on a Direct Subsidized or Unsubsidized Loan accrues and is capitalized (that is, added to principal) , does the capitalized interest count towards a borrower's aggregate loan balance for purposes of determining eligibility for additional loans? No. Only the original unpaid principal amount borrowed is counted towards a borrower's aggregate loan balance. 7. If a borrower qualifies for a very low Direct Subsidized Loan amount, are schools required to originate this amount prior to originating a Direct Unsubsidized Loan? The preamble to the December 1, 1994, final regulations states that schools are permitted to establish minimum loan amounts (59 FR 61669). If a school has established a minimum loan amount, and a student qualifies for a Direct Subsidized Loan amount that is less than the established minimum loan amount, the school could decide not to award any Direct Subsidized amount and could originate a Direct Unsubsidized Loan to cover the entire cost of attendance (up to the annual/aggregate limits). In this case, the school would not include the low Direct Subsidized amount in the calculation of the student's Direct Unsubsidized Loan eligibility. 8. Is there any limit to the number of times a student can receive the maximum annual loan award at a particular grade level without progressing to a higher grade level? There is no federal limit to the number of times the borrower may receive the maximum loan amount at the same grade level, as long as a borrower meets all eligibility requirements (including satisfactory academic progress requirements) and at least an academic year has elapsed before the borrower receives another loan. However, Direct Loan schools are allowed to establish a policy that would limit the number of times a student could receive the annual loan limit without progressing to a higher grade level. For example, a school could establish a policy that permits borrowers to receive the annual loan limit only once at a given grade level. The school's policy must be consistent and may not be applied on a case-by-case basis. CASH MANAGEMENT ISSUES 9. Can schools that receive disbursement rosters and for which the Loan Origination Center initiates funds drawdown (level two originating schools and schools that use the alternative originator) retain funds for more than three days without using them? Level two originating schools and schools using the alternative originator may only retain Direct Loan funds they have not disbursed to borrowers within three days of receipt of these funds if the students for whom the funds were intended are currently ineligible for the Direct Loan but will become eligible within the next seven days. Under cash management regulations, institutions are allowed to retain Title IV funds for an additional seven days, after the first three days have elapsed, if the institutions meet certain excess cash tolerance requirements and if they will disburse the funds by the end of that period. Because level two schools and schools that use the alternative originator must disburse Direct Loan funds to the borrower for whom the funds were originally intended, these schools should retain funds only if they know that they will be able to disburse the funds to that borrower within seven days. 10. A school is changing from using the alternative originator to draw down funds in the 1995-1996 academic year to drawing down its own funds in the 1996-1997 academic year. When the second disbursement of a 1995-1996 loan occurs after July 1, 1996, should the school draw down the funds for the disbursement or should the alternative originator? If the school originated certain 1996-1997 loans before July 1, 1996, but no funds have been drawn down, should the school draw down the funds or should the alternative originator? The school's origination functions are tied to the academic year. Therefore, the alternative originator will draw down funds for 1995-1996 loans, regardless of when the second disbursement occurs. The school will draw down funds for all 1996-1997 loans, regardless of when the school originated these loans. 11. Some schools that have been authorized by the Department of Education to be experimental sites have been given relief from the legal and regulatory requirement that borrowers receive multiple disbursements, even when the borrowers are enrolled for only a single term. How is this handled in the Direct Loan software? There is an edit in the Direct Loan system that prohibits a school from reporting a single anticipated disbursement of a Direct Loan, even when the borrower is enrolled for a single term. The 1996-97 system will accommodate single payments for schools granted that relief. However, for the current year, the experimental site schools will have to "work around" the existing edits, using the following guidelines. Experimental site schools that have been granted relief from this requirement will still have to send in two anticipated disbursements. They can submit two actual disbursements (they can do both on the same date), or they can submit a single actual disbursement for the full amount. PROMISSORY NOTE ISSUES 12. Are schools required to redo a promissory note if the loan period changes? If a disbursement would occur outside the loan period specified on the promissory note, the school must redo the promissory note. However, the disbursement may occur up to 10 days prior to the first day of a period of enrollment (in accordance with cash management rules), or the disbursement may occur up to 90 days after the loan period has ended (in accordance with the Direct Loan late disbursement guidelines). In all other situations, schools must not make a disbursement during any time period that is not covered on the promissory note. 13. What procedures are required for a school to submit a promissory note to the Loan Origination Center that has been signed by a disabled borrower whose signature is simply an "X"? Under 34 CFR 685.301(c)(2), Direct Loan schools are required to provide to the Department an executed, legally enforceable promissory note. Therefore, the school must follow applicable state law requirements necessary to enforce an "X" signature. These schools that submit to the Loan Origination Center a promissory note signed by an "X" must have the note notarized, if notarization is required by applicable state law. These schools should also include a note of explanation along with the promissory note indicating that the signature on the promissory note is that of the borrower and that the school has complied with applicable state law. 14. Are schools allowed to use the 1995-1996 promissory notes after June 30, 1996? No. The 1995-1996 promissory notes must be signed and dated by the borrower on or before June 30, 1996. As indicated in the right hand corner of the 1995-1996 promissory notes, the notes expire after June 30, 1996. Schools can use 1995-1996 promissory notes until the date of expiration but should dispose of any remaining 1995-1996 promissory notes after June 30, 1996. The Loan Origination Center will accept 1995-1996 promissory notes submitted after June 30, 1996, as long as the promissory note is signed and dated by June 30, 1996. Further, the disbursements on these loans may occur after June 30, 1996. DIRECT PLUS LOAN ISSUES 15. Does the 30-day delay requirement for first-time first-year borrowers apply to PLUS borrowers? No, this requirement applies only to student borrowers. 16. Does the Direct PLUS borrower need to authorize the crediting of PLUS funds to student accounts? Does the Direct PLUS borrower need to authorize the release of PLUS proceeds to the student, if there are any remaining proceeds after the student's account has been credited? Are authorization forms available? Parents authorize the crediting of Direct PLUS proceeds to the student's account when they sign the Direct PLUS promissory note. However, if there are any Direct PLUS proceeds remaining after the student's account has been credited and institutional charges have been paid, that money would go to the parent unless the parent authorizes the release of these funds to the student. The Department does not provide forms for this separate authorization. Institutions may develop their own forms for this purpose or may include a statement to be signed by the parent in other documents used by the school. 17. Can the student be an endorser on a Direct PLUS promissory note? No. Students are no longer allowed to be endorsers on Direct PLUS notes. Although prior guidance (in Direct Loan Bulletin #7, DL-94-8) provided that students were not prohibited from endorsing Direct PLUS notes, the Department has never recommended the practice as a standard operating procedure. Rather, this policy was established to allow students to endorse Direct PLUS notes under exceptional circumstances. However, in the year since this guidance was issued, the Department has determined that students have been endorsing Direct PLUS notes on a regular basis. To promote sound borrowing practices and to reduce the Department's risk in lending, it is necessary to change the current policy, and prohibit students from acting as endorsers on Direct PLUS Loans taken out on their behalf. Of course, statute provides for a student's additional eligibility for Direct Unsubsidized Loans in the event that the parent is denied a PLUS loan. LEAVE OF ABSENCE POLICY 18. How did the leave of absence policy change from the 1994-1995 academic year to the 1995-1996 academic year? 1994-1995 Academic Year From July 1, 1994, to June 30, 1995, a leave of absence was treated as a withdrawal. Under the regulations applicable to the 1994-1995 academic year, "If the student takes an approved leave of absence, the student's withdrawal date is the last recorded date of class attendance by the student, as documented by the institution" [see 34 CFR 668.22(i)(1)(i)(B)]. Therefore, if a student took a leave of absence during the 1994-1995 academic year, the grace period began on the day after the borrower's last recorded date of attendance. 1995-1996 Academic Year Effective July 1, 1995, a student who takes an approved leave of absence according to the requirements discussed below will not be considered to have withdrawn. Under regulations applicable to the 1995-1996 academic year and subsequent years, in any twelve-month period, an institution may grant a single leave of absence to a student; the leave of absence must not exceed 60 days [see 34 CFR 668.22(j)(2)]. A leave of absence must be requested by the student in writing and may not involve any additional institutional charges. Direct Loan borrowers remain in an in-school status during an approved leave of absence. If a borrower does not return to school after the approved leave of absence, the student's withdrawal date is the last recorded date of class attendance by the student, as documented by the institution. Therefore, a borrower who does not return to school after an approved leave of absence would go into repayment six months after the borrower's last recorded date of attendance. PRORATION 19. Can a school opt to prorate a borrower's loan on the basis of enrollment status (e.g., if the borrower is enrolled on a half-time basis, can the school certify a loan for one-half the annual loan limit)? Or can a school prorate if a borrower is attending only one quarter or only one semester in an academic year (e.g., under these circumstances, can the school certify a loan for one-half or one-quarter of the annual loan limit, respectively)? Proration is a required reduction in the annual loan limits based on statutory provisions. A school is required to prorate if the borrower is 1) enrolled in a program of study that is less than the statutory requirements in weeks or hours of instructional time for one academic year; or 2) enrolled in a program of study that is one academic year or longer and has less than a full academic year remaining (see the 1995-1996 Delivery System Trainee Guide for comprehensive guidance on proration). A borrower who is not enrolled on a full-time basis or is enrolled for only one semester or one quarter may be eligible for up to the applicable annual loan limit (based on cost of attendance, estimated financial assistance, and expected family contribution). Although the school may not prorate a loan on the basis of the student's enrollment status, the school can reduce the borrower's determination of need for a loan on a case-by-case basis [see 34 CFR 685.301(a)(5)]. Because reductions in need must be determined on a case-by-case basis, as a matter of practice, a school would not be able to reduce a borrower's determination of need for the loan simply because the borrower is enrolled on a half-time basis or is attending only one quarter or only one semester in an academic year. LATE DISBURSEMENTS 20. When making a late disbursement to a student, may a school disburse the full amount of the installment? Under the late disbursement policies in 34 CFR 685.303(d), in certain circumstances, a school may disburse a Direct Loan to a borrower after the borrower has withdrawn from school. However, when making the late disbursement, the school should not disburse an amount greater than a student's documented educational costs for the period of enrollment completed by the student. (Note that educational costs include both institutional and noninstitutional expenses.) This policy, which is included in the FFEL Program regulations, was inadvertently omitted from the Direct Loan Program regulations. However, the Department did not intend to establish a Direct Loan Program late disbursement policy that differs from the FFEL Program late disbursement policy. The Department will make a correction to the regulations to clarify the Department's intended late disbursement policy under the Direct Loan Program. Until this regulatory change is published in the Federal Register, schools are encouraged to follow the requirements currently provided in FFEL Program regulations when determining the amount of the late disbursement [see 34 CFR 682.604(e)]. 21. Are schools required to process late disbursements? No. If schools do not wish to process late disbursements, they are not required to do so. |