Bulletin ID
DLB - 00 - 48
| PublicationDate: 10/1/2000 BulletinID: DLB - 00 - 48 October 2000 DLB 00-48 Subject: New Repayment Incentive Benefits First Question & Answer Document Dear Partner: This is the first in a series of Question and Answer documents about the two new Direct Loan Program repayment incentive benefits that were announced by President Clinton and Secretary Riley in August. This document first answers general questions about the new repayment incentives and then focuses on the up-front interest rebate. We hope the information is helpful, and thank you for your ongoing partnership in the Direct Loan Program. Sincerely, Jane Holman Acting Director, Title IV Delivery Schools Channel New Repayment Incentive Benefits 1. What are the two new Direct Loan repayment incentive benefits that were announced by President Clinton and Secretary Riley in August? The first new repayment incentive is an up-front interest rebate that will be given to Direct Subsidized Loan, Direct Unsubsidized Loan, and Direct PLUS Loan borrowers beginning with loans for the 2000-2001 program year. The rebate amount is equal to 1.5 percent of the loan amount borrowed. This is the same amount that would result if we lowered the interest rate on the loan by approximately 0.24 percent--but the borrower will receive the rebate up front. Details about the up-front interest rebate are covered later in this Question and Answer document. The second new repayment incentive is an interest rate reduction of 0.8 percent that will be applied to all Direct Consolidation Loans that are made during the period from October 1, 2000 through September 30, 2001. The interest rate that applies to any Direct Consolidation Loan made during this one-year period will be lowered by 0.8 percent. Details about the interest rate reduction for Direct Consolidation Loans will be covered in a separate Question and Answer document that we will issue in the very near future. 2. Do borrowers need to do anything to keep these repayment incentive benefits? Yes. We have implemented these benefits to encourage timely repayment of Direct Loans. To keep the up-front interest rebate and the interest rate reduction benefits, borrowers must make their first twelve required monthly payments on time. We will issue a Question and Answer document about the payment requirement in the very near future. 3. What is the consequence if a borrower who receives the up-front interest rebate on a Direct Subsidized Loan, Direct Unsubsidized Loan, or Direct PLUS Loan does not make the first twelve required monthly payments on time? If the borrower does not make all twelve payments on time, we will add the rebate amount back to the principal balance on the borrower's loan account. 4. What is the consequence if a borrower whose Direct Consolidation Loan interest rate is lowered by 0.8 percent does not make the first twelve required monthly payments on time? If the borrower does not make all twelve payments on time, the borrower will lose the lower interest rate. Instead, the borrower will be charged the interest rate that normally applies to his or her loan without the reduction. Up-Front Interest Rebate on Subsidized, Unsubsidized, and PLUS Loans 5. How will SFA implement the up-front interest rebate program? In order to provide the up-front interest rebate to Direct Loan borrowers beginning this Fall without disrupting the 2000-2001 financial aid delivery process, we will implement the rebate program in two phases. The first phase will apply to the 2000-2001 program year, and the second phase will apply to the 2001-2002 program year and beyond. Phase I--2000-2001 Program Year 6. In the first phase of the up-front interest rebate program, will my school or our third-party software provider need to modify any processes or software related to 2000-2001 program year loans to ensure that our borrowers get this benefit? No. Neither you nor your third-party software provider, if you have one, will need to modify any processes or software related to 2000-2001 program year loans. Origination and disbursement software, specifications, and processes will remain the same for 2000-2001 program year loans. We do, however, encourage you to inform your borrowers of the new benefit through your correspondence, publications, and counseling. Note: Software changes will be required beginning with the 2001-2002 program year. See Q&A #21 for more information. 7. Will my school need to make any changes to 2000-2001 program year loans that we have already originated and/or disbursed to ensure that our borrowers get this benefit? No. You do not need to change any 2000-2001 program year loans that you have already originated and/or disbursed. We will provide the up-front interest rebate to all borrowers who have 2000-2001 program year loans regardless of when the loans are originated and disbursed. 8. Will the up-front interest rebate affect the gross and net disbursement amounts on 2000-2001 program year loans? No. The up-front interest rebate will not affect gross and net disbursement amounts in any way because we will provide the rebate after a loan has been disbursed. 9. How will a borrower receive the up-front interest rebate on a 2000-2001 program year loan? The borrower will receive the up-front interest rebate on a 2000-2001 program year loan through a credit to his or her loan account at the Direct Loan Servicing Center. Specifically, the Direct Loan Servicing Center will credit the borrowers loan account with the interest rebate amount--1.5 percent of the gross disbursement amount---each time a disbursement on a 2000-2001 program year loan is reported for that borrower. The credit is effective from the date of the disbursement. 10. Can you give an example of how the up-front interest rebate amount will be calculated and credited to the borrower's loan account? Yes. As an example-- A student borrows a $2,000 Direct Subsidized Loan, and the first disbursement is made on August 15th. The gross amount of the first disbursement is $1,000. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount--or 0.015 X $1,000 = $15. The interest rebate of $15 is credited to the borrower's loan account at the Direct Loan Servicing Center and is effective the same date that the disbursement was made. As a result, the actual outstanding principal balance on the loan as of August 15th is $985 ($1,000 less $15 = $985). 11. What amounts will be reflected in the National Student Loan Data System (NSLDS)? The Direct Loan Servicing Center will continue to report the total loan amount and the outstanding principal balance to NSLDS. Using the example in Q&A #10--After the first disbursement is reported, NSLDS would reflect a total loan amount of $2,000 and, assuming that the borrower has made no payments, an outstanding principal balance of $985. After the second disbursement is reported, NSLDS would reflect a total loan amount of $2,000 and, assuming that the borrower has made no payments, an outstanding principal balance of $1,970. 12. Because the outstanding principal balance is reduced, does the up-front interest rebate result in a borrower being eligible to receive additional loan money for the academic year? No. It is the total loan amount--not the outstanding principal balance on the loan--that is used to determine the borrower's eligibility. 13. Will SFA notify a borrower that his or her 2000-2001 program year loan will receive the up-front interest rebate? Yes. After the Loan Origination Center receives the first actual disbursement record for a 2000-2001 program year loan, it will send a letter to the borrower informing him or her of the interest rebate and how it will work. First, the Loan Origination Center will send letters to borrowers for whom first actual disbursement records have already been received. Then, the Loan Origination Center will send letters on an on-going basis to other borrowers after it receives their first actual disbursement records. Note: See Direct Loan Bulletin 00-44 (August 2000) for copies of the two letters--one for students and one for parents--that we began sending to borrowers on September 5, 2000. 14. When will the Direct Loan Servicing Center begin crediting the up-front interest rebate amount to borrowers' loan accounts? The Direct Loan Servicing Center will begin crediting the interest rebate amount to borrowers loan accounts in early November of this year. First, the Direct Loan Servicing Center will credit the loan accounts for all 2000-2001 disbursements that have been reported up to that time. Then, the Direct Loan Servicing Center will credit loan accounts as further disbursements are reported. 15. Can you give an example of how the up-front interest rebate will be credited for a student borrower whose loan's first actual disbursement record is reported before the Direct Loan Servicing Center begins crediting accounts in November? Yes. As an example-- A student borrows a $4,000 Direct Unsubsidized Loan for this school year, and the Fall gross disbursement of $2,000 was made on August 15th. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount--or 0.015 X $2,000 = $30. The interest rebate of $30 will be credited to the student's loan account at the Direct Loan Servicing Center in early November. The effective date of the credit is August 15th, and the outstanding principal balance on the Fall disbursement is $1,970. When the Spring gross disbursement of the remaining $2,000 is made on January 25th, another $30 will be credited to the student's loan account as of that date. As a result, the actual outstanding principal balance on the $4,000 loan is only $3,940. Of course, once repayment begins the loan balance may be higher if accrued interest was not paid. 16. What about for a parent borrower -- will the process illustrated in Q&A #15 work the same way? Yes. It will work the same way for a parent borrower. As an example-- A parent borrows an $8,000 Direct PLUS Loan for his or her childs college attendance this school year, and the Fall gross disbursement of $4,000 was made on August 15th. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount--or 0.015 X $4,000 = $60. The interest rebate of $60 will be credited to the parent's loan account at the Direct Loan Servicing Center in early November. The effective date of the credit is August 15th, and the outstanding principal balance on the Fall disbursement is $3,940. When the Spring gross disbursement of the remaining $4,000 is made on January 25th, another $60 will be credited to the parent's loan account as of that date. As a result, the actual outstanding principal balance on the $8,000 loan will be only $7,880. Of course, once repayment begins the loan balance may be higher if accrued interest was not paid. 17. Will the up-front interest rebate on a 2000-2001 program year loan be affected if a disbursement amount is adjusted upward or downward? Yes. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount. Therefore, if the gross disbursement amount is adjusted in either direction--upward or downward--the interest rebate amount must be recalculated. For example, if a borrower's gross disbursement amount of $2,000 is adjusted downward to $1,000, the Direct Loan Servicing Center will adjust the interest rebate amount downward from $30 to $15. Likewise, if a borrower's gross disbursement amount of $1,000 is adjusted upward to $2,000, the Direct Loan Servicing Center will adjust the interest rebate amount upward from $15 to $30. 18. What will happen if a borrower withdraws from my school after the Direct Loan Servicing Center credits the up-front interest rebate to the borrower's loan account? You will follow your normal procedure for determining if Title IV aid must be returned--using the net amount of the loan that you disbursed. If you return some or all of the net disbursement amount, the Direct Loan Servicing Center will adjust the interest rebate amount that it credited to the borrower's loan account accordingly. 19. Will the up-front interest rebate program affect my school's efforts to reconcile monthly or close out the 2000-2001 program year? No. The up-front interest rebate program will not affect your monthly reconciliation or your close out of the 2000-2001 program year because the up-front interest rebate does not affect the gross and net disbursement amounts of a 2000-2001 program year loan. Phase II--2001-2002 Program Year and Beyond 20. When does the second phase of the up-front interest rebate program begin? The second phase of the up-front interest rebate program will apply to loans made for the 2001-2002 program year and continues for program years beyond. 21. Will my school or our third-party software provider need to modify any processes or software related to 2001-2002 program year loans to ensure that our borrowers get this benefit? Yes. The second phase of the up-front interest rebate program will require modifications to your software. We will work with you and your third-party software providers as we develop the operational details of the 2001-2002 process. We are committed to getting the software and specifications out to you and your partners as quickly as possible. Additionally, we will describe the required modifications at our Electronic Access Conferences this Fall. For more information about the conferences, check the website at http://edeworkshop.walcoff.com. 22. How will a borrower receive the up-front interest rebate on a 2001-2002 program year loan? The borrower will receive the interest rebate on a 2001-2002 program year loan through an up-front add on to each Direct Loan disbursement. The rebate amount--1.5 percent of the gross disbursement amount--will be added after the 3 percent loan fee is subtracted from the gross disbursement amount. As a result, the net disbursement amount will be more than if the borrower had not received the rebate. 23. Can you give an example of how the up-front interest rebate amount will be calculated and applied to the borrower's gross disbursement amount? Yes. As an example-- A student borrows a $2,000 Direct Subsidized Loan. The gross amount of the first disbursement is $1,000. The loan fee is equal to 3 percent of the gross disbursement amount--or 0.03 X $1,000 = $30. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount--or 0.015 X $1,000 = $15. After the loan fee of $30 is subtracted from the gross disbursement amount the interest rebate of $15 is added. As a result, the net disbursement amount is $985 ($1,000 less $30 = $970 plus $15 = $985). 24. What amounts will be reflected in NSLDS? Remember, the Direct Loan Servicing Center reports the total loan amount and the outstanding principal balance to NSLDS. Using the example in Q&A #23--After the first disbursement is reported, NSLDS would reflect a total loan amount of $2,000 and, assuming that the borrower has made no payments, an outstanding principal balance of $1,000. After the second disbursement is reported, NSLDS would reflect a total loan amount of $2,000 and, assuming that the borrower has made no payments, an outstanding principal balance of $2,000. 25. How will a borrower be notified of the up-front interest rebate on a 2001-2002 program year loan? A student borrower will be notified of the up-front interest rebate on the Disclosure Statement that is provided to the borrower at or before the time of disbursement and on the Notice of Loan Disbursement that is sent to the borrower after the actual disbursement is reported to the Direct Loan Servicing Center. A parent borrower will be notified of the rebate on the Notice of Loan Disbursement. 26. Will the up-front interest rebate on a 2001-2002 program year loan be affected if a disbursement amount is adjusted upward or downward? Yes. The interest rebate amount is equal to 1.5 percent of the gross disbursement amount. Therefore, if the gross disbursement amount is adjusted in either direction--upward or downward--the interest rebate amount must be recalculated. For example, if a borrower's gross disbursement amount of $2,000 is adjusted downward to $1,000, the interest rebate amount will be adjusted downward from $30 to $15. Likewise, if a borrower's gross disbursement amount of $1,000 is adjusted upward to $2,000, the interest rebate amount will be adjusted upward from $15 to $30. 27. What will happen if a borrower withdraws from my school after the borrower receives the up-front interest rebate on a 2001-2002 program year loan? You will follow your normal procedure for determining if Title IV aid must be returned--using the net amount of the loan that you disbursed. If you return some or all of the net disbursement amount, the interest rebate amount will be adjusted accordingly. 28. Will the up-front interest rebate have any impact on my school's efforts to reconcile monthly or close out the 2001-2002 program year or a subsequent program year? Possibly. We may need to change the reports used in reconciliation and close out. As we work on those changes, we will ask schools to provide input. And, we will finalize and provide the changes to you as quickly as possible. |