() Summary: New Direct Loan Repayment Plans and Changes in the Treatment of Consolidated PLUS Loans and Federal Perkins Loans

Publication Date: July 2007

Bulletin ID: DLB-07-16

Summary: New Direct Loan Repayment Plans and Changes in the Treatment of Consolidated PLUS Loans and Federal Perkins Loans

Posted on 07-31-2007

Dear Partner:

This bulletin describes the changes to the repayment plans that are available to William D. Ford Federal Direct Loan (Direct Loan) Program borrowers as a result of the Higher Education Reconciliation Act of 2005 (the HERA), Pub. L. 109-171, and explains how and when the new repayment plans will be implemented. It also provides information on additional changes resulting from the HERA related to the treatment of Direct PLUS Loans, Federal PLUS Loans made under the Federal Family Education Loan (FFEL) Program, and Federal Perkins Loans when these loans are consolidated into a Direct Consolidation Loan.

Direct Loan Repayment Plan Changes

The HERA requires that the repayment plans offered in the Direct Loan Program generally be the same as the repayment plans that are available to borrowers in the FFEL Program. However, the Direct Loan Program will continue to offer an Income Contingent Repayment (ICR) Plan, while the FFEL Program offers an Income-Sensitive Repayment Plan. The HERA did not change any of the terms and conditions of the Direct Loan Program's ICR Plan.

There is also no change to the requirement that all of a borrower's Direct Loans must be repaid under the same repayment plan, except that a borrower may repay a Direct PLUS Loan under a different repayment plan if the borrower is repaying other Direct Loans under the ICR Plan.

In addition to the descriptions of the new Direct Loan repayment plans below, we have attached to this bulletin a chart that compares the new repayment plans with the repayment plans that were available before the changes made by the HERA.

As a result of the changes made by the HERA, Direct Loan Program borrowers will have a choice of the following repayment plans:

Standard Repayment Plan

Under the Standard Repayment Plan, a borrower makes a fixed monthly payment. The required monthly payment is calculated based on the borrower's Direct Loan debt and the interest rate(s) of the borrower's loans, but it will never be less than $50.00.

• For Direct Subsidized Loan, Direct Unsubsidized Loan, and Direct PLUS Loan borrowers, the maximum repayment period is 10 years.

• For Direct Consolidation Loan borrowers, the maximum repayment period ranges from 10 to 30 years, depending on the borrower's total education loan indebtedness (see the chart below).

Under the Graduated Repayment Plan, a borrower will make a monthly payment that starts out low and then increases, usually every two years, until the loan is paid in full. The required monthly payment is calculated based on the borrower's Direct Loan debt and the interest rate(s) of the borrower's loans, but it will never be less than the amount of interest that accrues each month.

• For Direct Subsidized Loan, Direct Unsubsidized Loan, and Direct PLUS Loan borrowers, the maximum repayment period is 10 years.

• For Direct Consolidation Loan borrowers, the maximum repayment period ranges from 10 to 30 years, depending on the borrower's total education loan indebtedness (see the chart below).

For Direct Consolidation Loan borrowers, the maximum repayment periods under the Standard and Graduated repayment plans are as follows:

Extended Repayment Plan

The Extended Repayment Plan is available only to new Direct Loan borrowers on or after October 7, 1998 who have an outstanding Direct Loan balance that is more than $30,000.

Under the Extended Repayment Plan, a borrower may choose to make either fixed or graduated monthly payments. With either option, the required monthly payment is calculated based on the borrower's Direct Loan debt and the interest rate(s) of the borrower's loans. If a borrower chooses graduated payments, the monthly payment will start out low and then increase, usually every two years, until the loan is paid in full. Under a graduated repayment schedule, the required monthly payment will never be less than the amount of interest that accrues each month.

• For all Direct Loan borrowers, the repayment period under the Extended Repayment Plan is 25 years, regardless of the amount of the borrower's loan debt.

Income Contingent Repayment (ICR) Plan

The ICR Plan is available only to Direct Subsidized Loan, Direct Unsubsidized Loan, and Direct Consolidation Loan borrowers. Direct PLUS Loan borrowers may not repay their loans under the ICR Plan. However, borrowers who consolidate Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan may repay the Direct Consolidation Loan under the ICR Plan (see below for more information).

Under the ICR Plan, a borrower's monthly payment amount is calculated based on the borrower's annual income (and the income of the borrower's spouse, if the borrower is married), family size, and total Direct Loan debt.

• For all Direct Loan borrowers, the maximum repayment period is 25 years. Any loan amount that has not been repaid after 25 years will be forgiven. However, the amount that is forgiven may be treated as taxable income for Federal and state income tax purposes.

In addition to the four repayment plans described above, the Direct Loan Program will continue to offer alternative repayment plans to borrowers who demonstrate that the terms of the other available Direct Loan repayment plans do not adequately meet their needs.

Implementation of New Direct Loan Repayment Plans

The new Direct Loan Program repayment plans, as described above, will be implemented effective September 10, 2007, as follows:

• Borrowers who select an initial repayment plan on or after September 10, 2007 -- The only repayment plans available to a Direct Loan borrower who selects an initial repayment plan on or after September 10, 2007 will be the four plans described above.

• Borrowers who want to change repayment plans on or after September 10, 2007 -- If a Direct Loan borrower wants to change to a different repayment plan on or after September 10, 2007, only the new repayment plans will be available, and all of the borrower's loans must be repaid under the new plan that the borrower selects.

• Borrowers who selected a repayment plan before September 10, 2007, but who will enter repayment on or after that date -- A Direct Loan borrower who selected one of the pre-HERA Direct Loan repayment plans prior to September 10, 2007 will be placed on that pre-HERA repayment plan when the borrower's loan enters repayment, even if that is on or after September 10, 2007.

• Borrowers who were in repayment before September 10, 2007 -- A Direct Loan borrower who was in repayment on a loan under one of the pre-HERA Direct Loan repayment plans before September 10, 2007 will remain on the pre-HERA repayment plan. Note, however, that if a borrower with Direct Loans in repayment under one of the pre-HERA repayment plans consolidates all of those loans into a Direct Consolidation Loan on or after September 10, 2007, only the new repayment plans will be available for the Direct Consolidation Loan.

• Borrowers in repayment before September 10, 2007 who receive new loans that will enter repayment on or after September 10, 2007 -- If a borrower who entered repayment under one of the pre-HERA Direct Loan repayment plans before September 10, 2007 later receives new loans that will enter repayment on or after that date, the new loans will automatically be placed on the same pre-HERA repayment plan as the earlier loans, unless the borrower wants to choose one of the new repayment plans for all of the borrower's loans.

Additional Changes Related to Implementation of New Direct Loan Repayment Plans

• Direct Loan Publications -- Our Direct Loan publications and other materials are being updated to reflect the new Direct Loan repayment plans that are described in this bulletin. Since the revised publications will cover only the new repayment plans, schools should continue to make information about the pre-HERA repayment plans available to students who will enter repayment under one of those plans. We will provide more detailed information about the revised Direct Loan publications and their availability in a subsequent Direct Loan Bulletin.

• Direct Loan Online Exit Counseling -- Effective September 10, 2007, borrowers who complete online exit counseling at www.dl.ed.gov will be provided with information on the changes to the Direct Loan repayment plans. As explained earlier in this bulletin, borrowers who selected a pre-HERA repayment plan before September 10, 2007 will remain on that plan when they enter repayment, but during online exit counseling they will have the option of selecting one of the new repayment plans.

• Borrower-Specific Exit Counseling Materials -- Borrower-specific exit counseling materials are mailed to schools upon request at preset intervals (30, 60, or 90 days) before a borrower leaves school.

• Exit counseling materials that are scheduled to be mailed before September 10, 2007 will include information on the pre-HERA Direct Loan repayment plans.

• Exit counseling materials that are scheduled to be mailed on or after September 10, 2007 will include information on the new repayment plans.

If a school has already ordered exit counseling materials that are scheduled to be mailed before September 10, 2007, but would prefer to delay the mailing of the materials so that they will include information on the new repayment plans, the school should contact the Direct Loan Servicing Center's School Services Division at 888/877-7658.

Treatment of Direct PLUS Loans and Federal PLUS Loans Included in a Direct Consolidation Loan

The HERA requires that Direct Consolidation Loans generally have the same terms and conditions as Federal Consolidation Loans made under the FFEL Program. As a result, borrowers who consolidate Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan are no longer subject to credit checks, and any Direct Consolidation Loan made on or after July 1, 2006 may be repaid under the ICR Plan, even if the Direct Consolidation Loan paid off prior PLUS Loans. A Direct PLUS Loan or Federal PLUS Loan that is consolidated into a Direct Consolidation Loan now becomes part of a Direct Unsubsidized Consolidation Loan that may include other non-PLUS unsubsidized loans. There is no longer a separate Direct PLUS Consolidation Loan category.

Prior to the HERA, a Direct PLUS Loan or Federal PLUS Loan that was consolidated into a Direct Consolidation Loan became part of a Direct PLUS Consolidation Loan, and a Direct PLUS Consolidation Loan was subject to the same terms and conditions as a Direct PLUS Loan. This meant that a borrower who wanted to consolidate a Direct PLUS Loan or Federal PLUS Loan had to pass a credit check and could not repay the Direct PLUS Consolidation Loan under the ICR Plan. Borrowers with existing Direct PLUS Consolidation Loans that were made before July 1, 2006 remain ineligible for the ICR Plan.

Treatment of Federal Perkins Loans Included in a Direct Consolidation Loan

As noted above, the HERA now requires that Direct Consolidation Loans generally have the same terms and conditions as Federal Consolidation Loans. Another result of this change is that a Federal Perkins Loan will now become part of a Direct Unsubsidized Consolidation Loan when it is consolidated into a Direct Consolidation Loan. A Direct Unsubsidized Consolidation Loan borrower is charged interest on the loan during all periods, including deferment periods. This change will be implemented effective with Direct Consolidation Loans made on or after September 10, 2007.

A Federal Perkins Loan that is consolidated into a Direct Consolidation Loan before September 10, 2007 will continue to become part of a Direct Subsidized Consolidation Loan. A Direct Subsidized Consolidation Loan borrower is not charged interest on the loan during deferment periods.

If you have questions about the information contained in this bulletin, please contact the Direct Loan Servicing Center's School Services Division at 888/877-7658.

Thank you for your ongoing partnership in the Direct Loan Program.

Sincerely,

William Leith
Acting General Manager, Application, Operations and Delivery Services

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