Bulletin ID
DLB - 96 - 5
| PublicationDate: 2/1/96 BulletinID: DLB - 96 - 5 February 1996 DLB-96-5 Summary: This bulletin clarifies the definition of a disbursement in the Direct Loan Program and clarifies the date a disbursement is made. Dear Colleague: The purpose of this letter is to clarify what constitutes a William D. Ford Federal Direct Loan (Direct Loan) Program disbursement and to clarify the date a Direct Loan disbursement is made. Some schools are using institutional funds to disburse a Direct Loan to a student or a parent borrowing on behalf of a student prior to the drawdown and receipt of Title IV monies. Other schools are showing that a student's institutional charges have been offset by a Direct Loan when no monies (institutional or federal) actually have been credited to the student's account. This second practice is commonly known as the use of "dummy credits." Other institutions disburse Direct Loan Program monies only after receiving federal funds. Such differing institutional practices have given rise to a number of questions regarding the definition of "disbursement" in the Direct Loan Program and how to determine the date a Direct Loan disbursement is made. Accurately determining the date of disbursement is important for several reasons. Unsubsidized loan borrowers are charged interest beginning on the date of disbursement, regardless of whether federal or institutional funds are used to make the disbursement. Also, PLUS borrowers enter repayment the day the loan is fully disbursed. Finally, the Department has requested that schools submit loan origination records, initial and subsequent disbursement records, and promissory notes no later than 30 days following the date of disbursement. (Beginning July 1, 1996, schools will be required by regulations to submit loan origination records, disbursement records, and promissory notes no later than 30 days following the date of disbursement. See Federal Register, Volume 60, Number 231, page 61794.) Thus, due to the importance of determining an accurate date of disbursement, the Department is providing the following guidance. Definition of a Direct Loan Disbursement A Direct Loan disbursement can only occur with the crediting of a student's account with actual funds, the issuance of funds directly to the borrower in the form of cash or a check, or the initiation of the electronic transfer of funds (EFT) to the borrower's bank account. The date a Direct Loan is disbursed is the date the earliest of these transactions occurs and must be within the timeframes mandated by Subpart K of the Student Assistance General Provisions regulations, which govern cash management. The Direct Loan funds disbursed may be federal or institutional. Discussion A Direct Loan disbursement is always subject to the cash management regulations regardless of whether the disbursement is made with federal funds or institutional funds. However, the cash management regulations do not govern the use of institutional funds that are not reported by the school as a Direct Loan disbursement, nor do these regulations govern the use of dummy credits to represent an estimated Direct Loan on a student's account. An institution may give its own funds (either directly or by credit to a student's account) to a Direct Loan borrower at any time before the actual Direct Loan is disbursed. For example, an institution may give institutional funds more than 10 days prior to the first day of classes to a student who is expected to receive a Direct Loan. However, the institution may not report that disbursement as a Direct Loan disbursement because the disbursement would be viewed as a violation of the cash management regulations. The earliest date that a school may make a Direct Loan disbursement is 10 days prior to the first day of classes. An institution that gives its own funds to a borrower more than 10 days prior to the first day of classes has made a cash advance or a short-term loan to the student until the Direct Loan disbursement could occur within the guidelines permitted by the cash management regulations. On or after the 10th day before the start of classes, this school may report, if it chooses, a Direct Loan disbursement using institutional funds. However, the school also has the option to wait until federal funds are actually received before it makes and reports the Direct Loan disbursement. When an institution uses federal funds to disburse a Direct Loan, the date of disbursement is the date that the funds are applied to the account or given to the student by EFT, cash or check. However, when institutional funds are given to the borrower directly or applied to the student's account by the school, the school may at any time, in accordance with the cash management regulations, determine such a transaction to be a Direct Loan disbursement up to the date that federal funds are used to reimburse the institution. Finally, I would like to clarify that under no circumstances will an institution that chooses to use institutional funds to make a Direct Loan disbursement be entitled to receive any interest payments from the Department or the student on that disbursement. If a school chooses to use institutional funds to make Direct Loan disbursements and draws down federal funds to reimburse itself at a later date, the institution may not charge the Department or the student interest on the disbursement for the period of time between the date the disbursement is made and the date the institution receives federal funds to reimburse itself for the disbursement. We hope this information is helpful in clarifying the definition and date of disbursement. Questions and Answers are attached to further clarify these issues. If you have additional questions or concerns, please call the Direct Loan Policy Staff at 202-708-9406. Sincerely, Diane Voigt, Chair Direct Loan Task Force Direct Loan Program Questions and Answers Concerning Date of Disbursement Question: An institution uses its own funds to disburse a Direct Unsubsidized Loan or Direct PLUS loan 10 days before the first day of classes and reports the disbursement as a Direct Loan disbursement. The institution does not draw down the Direct Loan funds for that student until after the first day of classes. What date must the institution report as the Direct Loan disbursement date? When does interest begin to accrue on the Direct Loan? Answer: Because the institution chose to record the disbursement as a Direct Loan disbursement, the institution reports the Direct Loan disbursement date as the date the Direct Loan disbursement was made with institutional funds, that is, 10 days before the first day of classes. The borrower will be responsible for the interest that begins to accrue on the Direct Unsubsidized Loan or Direct PLUS loan beginning on that same date. Question: Prior to the first day of classes, an institution uses its own funds to credit a student's account and gives excess proceeds directly to a borrower for an anticipated Direct Loan. These funds have not been recorded by the institution as a Direct Loan disbursement. The student does not attend classes and therefore does not establish eligibility for the loan. May the school now record the institutional funds as a Direct Loan disbursement and reimburse itself for the advanced funds? Answer: No. Except for the late disbursement and early payment provisions [34 CFR 685.303(d) and 668.165(c)], at the time of disbursement, a borrower must be eligible for a Direct Loan. The institution may not disburse a Direct Loan to an ineligible student (or to a parent borrowing a Direct PLUS loan on behalf of the ineligible student). Since the institutional funds were not recorded as a Direct Loan disbursement, the institution does not have the choice of recording those funds now as a Direct Loan disbursement because the student is not eligible now. Also, the institution may not draw down funds to reimburse itself because a Direct Loan disbursement was never made. Question: Prior to the first day of classes, an institution uses its own funds to credit a student's account and gives excess proceeds directly to a borrower for an anticipated Direct Loan. These funds are recorded by the institution as a Direct Loan disbursement. The student does not attend classes and therefore does not establish eligibility for the loan. May the school now reimburse itself for the advanced funds? Answer: The school may be able to reimburse itself for some of the Direct Loan funds disbursed. First, the school is required to reduce the Direct Loan disbursement by the amount of funds applied to the student's account and by the amount of payments made by the student to the school to the extent that they do not exceed the total amount of loan proceeds disbursed by the school. If payments by the student to the school were sufficient to offset the full amount of the proceeds disbursed directly to the student, the entire loan would be canceled and the school would not be able to reimburse itself with federal funds. However, if payments by the student to the school were insufficient to offset the full amount of the proceeds disbursed directly to the student, the loan would be reduced to the amount remaining (that is, the amount not offset). The school would be able to reimburse itself with federal funds only for this remaining amount. After being notified by the school that the borrower was ineligible for the loan and of the amount of the loan funds disbursed directly to the student that were not offset, the Direct Loan Servicer will send the student a thirty-day demand letter for the remaining amount. [See 34 CFR 685.303(b)(3).] Question: Thirty days before the first day of classes, an institution uses its own funds to credit a student's account for the amount of a Direct Loan the student is expected to receive. The institution draws down and receives federal funds for the student's Direct Loan 10 days before the first day of classes. What date should the institution report as the date the Direct Loan was disbursed? Is the date different if the institution used "dummy" credits to show that a student's balance was offset by a Direct Loan? Answer: In both of the above cases, the school did not record the institutional funds as a Direct Loan disbursement. The cash management regulations require that the Direct Loan disbursement occur within three days following the date the institution receives the federal monies. Since federal funds were received by the school on the 10th day prior to the start of classes, the Direct Loan disbursement date must be on or between the 10th and 7th day before the first day of classes. The Direct Loan disbursement date is the date the school actually applies the funds to the student's account or gives the funds to the student by EFT, cash or check. Note, the disbursement date is not affected by the institution's use of "dummy" credits for accounting purposes. Question: Thirty days before the first day of classes, an institution uses its own funds to credit a student's account for the amount of a Direct Loan the student is expected to receive. When may the school record these institutional funds as a Direct Loan disbursement? Answer: The earliest date that a school may make a Direct Loan disbursement is 10 days prior to the first day of classes. Therefore, on or after the 10th day before the start of classes, this school may, but is not required to, record a Direct Loan disbursement using institutional funds. The school may, if it chooses, wait to record a Direct Loan disbursement until it draws down and receives federal monies. |