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AwardYear: 1998-1999 EnterChapterNo: 11 EnterChapterTitle: William D. Ford Federal Direct Loan Program SectionNumber: 2 SectionTitle: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans PageNumbers: 13-42 hb11-14.pdf    hb11-15.pdf    hb11-30.pdf   This section compares the terms and conditions of Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. CREDIT HISTORY ----------------- [[34 CFR 685.200(b)(1)(vii)]] A borrower's credit history does not affect his or her eligibility to borrow Direct Subsidized and Unsubsidized Loans. For Direct PLUS Loans, credit history is a factor: A parent with an adverse credit history is not eligible for a Direct PLUS Loan unless the parent meets additional criteria, discussed below. The Loan Origination Center obtains a credit report for every Direct PLUS Loan applicant. An applicant is considered to have an adverse credit history if he or she - is delinquent in repaying any debt by 90 days or more as of the date of the credit report; - has, during the five years preceding the credit report's date, been determined to be in default on a debt; has had his or her debts discharged in bankruptcy; or has been the subject of foreclosure, repossession, tax lien, wage garnishment, or write-off of an SFA debt. The absence of a credit history is not considered to be an adverse credit history. That is, a parent cannot be rejected for a Direct PLUS Loan because he or she has no credit history. [[Endorser and extenuating circumstances]] A parent may still be able to receive a Direct PLUS Loan by obtaining an endorser with no adverse credit history. (The endorser may not be the student for whom the parent is borrowing.) Alternatively, a parent may appeal a determination of adverse credit history to the Department by documenting extenuating circumstances. If the Department is satisfied such circumstances exist, the parent is allowed to borrow a Direct PLUS Loan. LOAN LIMITS ------------- [[Direct PLUS Loans]] Direct PLUS Loans do not have finite annual and aggregate loan limits, as do Direct Subsidized and Unsubsidized Loans (see below). A parent may borrow any amount up to the dependent student's cost of attendance (COA) minus other estimated financial assistance for that student (COA - EFA = Direct PLUS Loan limit). [[Direct Subsidized and Unsubsidized Loans]] Loan limits for Direct Subsidized and Unsubsidized Loans and subsidized and unsubsidized Federal Stafford Loans are the same. The chart below shows the maximum amounts a student may borrow in a combination of Direct Subsidized and Unsubsidized Loans. Direct Loan Program borrowing limits always include the amounts a student has outstanding in subsidized and unsubsidized loans under both the Direct Loan and FFEL programs, even if the student has consolidated any of these loans. If the borrowing limits have been met, the loans must be repaid in full or in part before a student may apply again for Direct Subsidized or Unsubsidized Loans. Federal and Direct PLUS Loans are not included when assessing outstanding subsidized and unsubsidized indebtedness. [[This file contains the chart "Direct Subsidized and Unsubsidized Combined Annual and Aggregate Loan Limits" on page 11-14 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]] [[This file contains the chart "Direct Loan Program: Undergraduate Loan Limits" on page 11-15 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]] [[Dependent undergraduate students]] A dependent undergraduate student who has not yet successfully completed his or her first year of study may borrow combined subsidized and unsubsidized loans not to exceed an annual total of - $2,625 for a program of study at least an academic year in length; - $1,750 for a program of study at least two-thirds of an academic year but less than a full academic year in length; and - $875 for a program of study at least one-third but less than two- thirds of an academic year in length. Note: Students may not receive Direct Loans for programs that are less than one-third of an academic year. A dependent undergraduate student who has successfully completed his or her first year of study but not the second year may borrow up to $3,500 in combined subsidized and unsubsidized loans for a period of at least an academic year in length. If the remaining portion of the program is less than an academic year, the loan must be prorated. (See page 11-19 for a discussion of proration.) For a dependent undergraduate student who has successfully completed his or her first and second year of study but not the remainder of the program, the combined subsidized and unsubsidized loan limit is $5,500 for a period of at least an academic year in length. If the remaining portion of the program is less than an academic year, the loan must be prorated. The maximum aggregate amount dependent undergraduates may borrow in a combination of subsidized and unsubsidized loans is $23,000. Independent students are eligible for higher annual and aggregate limits in Direct Unsubsidized Loans, as the charts on the previous pages show. [[Independent undergraduate students]] An independent undergraduate student who has not yet successfully completed his or her first and second year of study may borrow additional amounts of Direct Unsubsidized Loans not to exceed - $4,000 for a program of study (or remaining portion of a program) that is at least an academic year in length; - $2,500 for a program of study (or remaining portion of a program) that is at least two-thirds but less than a full academic year in length; and - $1,500 for a program of study (or remaining portion of a program) that is at least one-third but less than two-thirds of an academic year in length. As mentioned earlier, students may not receive Direct Loans for programs that are less than one-third of an academic year. An independent undergraduate student who has successfully completed his or her first and second year of study but not the remainder of the program may borrow additional amounts of Direct Unsubsidized Loans not to exceed $5,000 for a period of at least an academic year in length. If the remaining portion of the program is less than an academic year, the loan must be prorated (see page 11-19). The maximum aggregate amount an independent undergraduate may borrow in Direct Subsidized and Unsubsidized Loans is $46,000. However, no more than $23,000 of this amount may be in subsidized loans. Remember that the aggregate limit includes amounts borrowed under the FFEL Program. [[Dependent student eligibility for higher limits--34 CFR 685.203(c)]] Dependent students may be eligible for the same annual and aggregate loan limits as independent undergraduate students if it is likely a parent will be precluded from borrowing Direct PLUS Loans and is otherwise unable to provide the EFC. The school must receive documentation of exceptional circumstances showing why a parent cannot borrow. Such circumstances include an adverse credit history or situations where the parent's whereabouts are unknown, the parent is incarcerated, or the parent receives only public assistance or disability benefits. Financial aid administrators must review the family's financial status and consider their students' indebtedness before permitting them to borrow under higher Direct Unsubsidized Loan limits. Aid administrators also must put in writing the reason the parent cannot obtain a Direct PLUS Loan and keep supporting documentation in the student's file. [[Graduate students]] Graduate students may borrow up to $18,500 annually in a combination of subsidized and unsubsidized loans. No more than $8,500 may be in subsidized loans. Loans for graduate students are not subject to proration. The maximum aggregate amount, which includes both undergraduate and graduate borrowing, is $138,500. No more than $65,500 of this amount may be in subsidized loans. [[Frequency for annual loan limits]] Annual Direct Loan limits are restricted by the time period to which they apply. That is, to be eligible to receive a subsequent loan, a borrower must meet certain calendar time or academic progress standards. For more information, see "Frequency for Annual Loan Limits" in this section. [[Determining academic year level]] A student's academic year level for loan limit purposes is set according to the school's standards for the time normally required to complete a given program. For example, if the school determines a program normally can be completed in two years of full-time study, a student in that program can never receive more than the second- year annual loan limit of $3,500 in any given year, no matter how long it takes the student to finish. Further, in a program of undergraduate study, the number of years a student has completed includes any prior enrollment in an eligible program of undergraduate education for which the student was awarded an associate or bachelor's degree--if the school requires the degree for admission to the program in which the student is currently enrolled at the school. [[Teacher certification]] There are two cases (teacher certification and preparatory coursework) where students are eligible for Direct Loans without being enrolled in an eligible program (see Chapter 2, Section 1). Loan limits for these students are affected by factors besides the length of the program. Students enrolled in teacher certification or recertification programs are considered as fifth-year undergraduate students when determining annual loan limits and may borrow up to $5,500 a year (plus $5,000 in unsubsidized loans for an independent student), subject to reductions for programs less than an academic year in length. [[Preparatory coursework]] Students taking coursework necessary for enrollment in an eligible program for a single period of up to 12 consecutive months may receive Direct Loans for this preparatory coursework. Students preparing for an undergraduate program borrow at the loan level determined for first-year undergraduates. A student with a bachelor's degree preparing for a graduate or professional program may borrow up to the annual loan limit for fifth-year undergraduates. [[Exceeding loan limits]] Students who borrow more than the annual or aggregate loan limits for which they are eligible under SFA loan programs will lose eligibility for further aid from any SFA Program until the excess amount is repaid in full or unless other arrangements are made (see Section 1). [[Health profession students' eligibility for higher unsubsidized limits--P.L. 104-134]] An increase in annual Direct Unsubsidized Loan limits is permitted for students who could have borrowed under the Health Education Assistance Loan (HEAL) Program but who are no longer eligible because they did not borrow under that program before October 1, 1995. Students in this category who are enrolled full time in schools participating in the HEAL Program are eligible for higher Direct Unsubsidized Loan amounts. Conversely, students who remain eligible to borrow under HEAL (students who did receive HEALs before October 1, 1995) may not receive increased Direct Loan amounts. A school participating in HEAL is one that made HEAL disbursements during Fiscal Year 1995 (October 1, 1994 through September 30, 1995) and has continued to participate in the program. Schools that have withdrawn from the HEAL program--or have simply stopped making HEALs--after FY 95 may originate Direct Loans at the increased limits for any loan period beginning before July 1, 1998 (see "Dear Colleague" Letter GEN-97-4 for more information). The Department will notify such schools if they are permitted to originate at the increased limit after July 1, 1998. When determining additional Direct Unsubsidized Loan limits, participating HEAL schools must use the current HEAL Program and Discipline loan limits, described in the Department of Health and Human Services "Student Financial Aid Guidelines Notebook" in Section 104.3.2. Note that, unlike in HEAL, no need analysis is required for the extra Direct Unsubsidized Loan amounts. [[NEW]] In general, aggregate Direct Unsubsidized Loan limits still apply for health professions students. The Department is increasing the aggregate limit only for those health professions students who are eligible to receive the increased annual amounts. The new aggregate limit for these students (and only these students) will be $189,125, less the aggregate amounts of any subsidized loans made to the student. The Department plans to publish a "Dear Colleague" Letter on this topic shortly. When issued, this up-to-date information will also be available on the SFA BBS. PRORATED ANNUAL LOAN LIMITS--DIRECT SUBSIDIZED AND UNSUBSIDIZED LOANS ----------------------------------------------------- [[Proration applies only to undergraduates]] Generally, a dependent or independent undergraduate may borrow up to the annual limit applicable to the student's year in school. However, the maximum amount an undergraduate student may borrow must be reduced, or prorated, in certain situations. Note that Direct PLUS Loans are not subject to proration. Loans must be prorated when a student is enrolled - in a program containing fewer weeks, clock hours, or credit hours than the statutory minimum academic year; or - in a program that is longer than an academic year, but the final period of study is shorter than an academic year.1 1 Proration is also required in certain cases where a program is exactly one academic year long: For example, a student withdraws from a one-year program and later, in a new academic year, completes the program (either re-enrolling at the original school or enrolling at another school). In this case, the student is enrolled in a final period of study that is shorter than an academic year. There are two types of proration: fixed and proportional. - Fixed prorated loan limits are set dollar amounts based on the length of a student's program (or final period of study) in relation to a full academic year. - Proportional prorated loan limits are calculated amounts based on the ratio of the credit or clock hours in a final period of study to the credit or clock hours in the school's academic year. [[Program less than AY--fixed proration]] Schools use fixed proration when students are enrolled in programs containing fewer weeks, clock hours, or credit hours than the statutory minimum academic year. Chapter 3 contains extensive information about academic year requirements. Briefly, an academic year must contain at least 30 weeks of instructional time2 and 24 semester or trimester hours, 36 quarter hours, or 900 clock hours. To determine the length of a student's program in relation to a full academic year, schools must compare two fractions: the number of clock or credit hours in the program divided by the number of hours in the academic year, and the number of weeks of instructional time in the program divided by the number of weeks in the academic year. The lesser of these fractions determines the relation of program length to academic year length. 2 The Department may waive this requirement for some programs of fewer than 30 weeks (see Chapter 3). Fixed proration example Hector, an independent student, has enrolled in a 650-clock hour, 28-week program. The school defines the academic year for the program as 900 clock hours and 30 weeks of instructional time. Because Hector's program is shorter than an academic year, his Direct Loans must be prorated. The school compares the two fractions: 650 clock hours in 28 weeks instructional program time in program ------------------ ------------------------ 900 clock hours in 30 weeks instructional academic year time in academic year 650/900=.72 28/30=.93 Of the two fractions, the smaller is 650/900 (.72); the school uses .72 as the length of Hector's program when determining the prorated loan amount. The program is less than a full year but greater than 2/3 (.66) of an academic year. Therefore, Hector may borrow up to $1,750 in combined Direct Subsidized and Unsubsidized Loans (see the loan limits chart on page 11-15). Because he is an independent student, he may be eligible for an additional prorated Direct Unsubsidized Loan of up to $2,500. [[Final period of study less than AY]] Schools must prorate a student's loan if the final period of study is shorter than an academic year. A final period of study is one at the end of which a student will complete a program. At a term-based credit hour school (where the academic year is measured in semesters, trimesters, quarters, or other terms), a final period of study is considered shorter than an academic year if the final period consists of fewer terms than the school's scheduled academic year. At a term-based clock hour school (where the academic year is measured in semesters, trimesters, quarters, or other terms), a final period of study is considered shorter than an academic year if the final period consists of fewer terms than the school's scheduled academic year or fewer clock hours than the minimum statutory requirements for a full academic year. Terms within the same academic year as the student's final term are considered part of the final period of study, even if separated from the final term by a term in which the student is not enrolled. Rousimoff College has an academic year that consists of three quarters: fall, winter, and spring. Andre will be enrolling in the fall and spring quarters, but not the winter quarter, and will graduate at the end of the spring quarter. Because the fall quarter is in the same academic year as Andre's final quarter, it is part of the final period of study, even though there is a term between the final quarter and the fall quarter in which Andre will not enroll. Because the fall quarter is part of the final period of study, the loan Andre receives in the fall must be prorated, just as his spring loan must be prorated. At a nonterm school (where programs are measured only in clock or credit hours), a final period of study is considered less than an academic year if the final period consists of fewer clock or credit hours than the minimum statutory requirements for a full academic year. To prorate the loan for a program that exceeds an academic year but has a final period of study less than a full academic year in length, schools must calculate what proportion of a full academic year the final period of study represents. The loan amount is then prorated on that basis. Final period example Jose is an independent third-year student at Van Dam College. Van Dam's academic year has 36 quarter hours and three quarters. Jose needs to complete only 24 quarter hours to finish his program and enrolls in the fall and winter quarters. Because his final period of study (2 quarters) is less than an academic year (3 quarters), his Direct Loans must be prorated. The school determines the proportion of the academic year the final period of study represents by dividing the credit hours in this period by the number in a full academic year: 24 quarter hours in final period --------------------------------- 36 quarter hours in academic year The school then multiplies the loan limit for all third-year students ($5,500) by 24/36 to determine the maximum Direct Subsidized Loan Jose can receive: 24/36 X $5,500 = $3,667 Jose can receive up to $3,667 in combined Direct Subsidized and Unsubsidized Loans. Because Jose is an independent student, he may be eligible for an additional Direct Unsubsidized Loan. To determine the amount, Van Dam multiplies the Unsubsidized limit for independent students ($5,000) by 24/36: 24/36 X $5,000 = $3,333 Jose may be eligible for an additional prorated Direct Unsubsidized Loan of up to $3,333. In some cases, the school will use both fixed and proportional proration to determine the loan amount for a final period of study. See the example on the next page. Mixed proration example Andre is an independent second-year student at Rousimoff College. He has 16 quarter hours to complete in his program and will enroll in the fall and spring quarters. Each quarter at Rousimoff consists of 10 weeks of instructional time. Andre will graduate at the end of the spring quarter. Because this final period of study is shorter than an academic year, Andre's Direct Loans must be prorated. Rousimoff determines the length of the final period by dividing the number of quarter hours in the period by the number of hours in the academic year: 16 quarter hours in final period -------------------------------- 36 quarter hours in academic year The school then multiplies the loan limit for all second-year students ($3,500) by 16/36 to determine the maximum amount Andre can receive in combined Direct Subsidized and Unsubsidized Loans: 16/36 X $3,500 = $1,556 Because Andre is an independent student, he may be eligible for an additional Direct Unsubsidized Loan. The school compares the two fractions required for fixed proration: 16 quarter hours in 20 weeks instructional final period time in final period ------------------- --------------------------- 36 quarter hours in 30 weeks instructional academic year time in academic year 16/36 = .44 20/30 =.67 Of the two fractions, the smaller is .44; the school uses .44 as the length of Andre's final period of study when determining the prorated loan amount. The period is less than 2/3 of an academic year (.66) but greater than 1/3 (.33). Therefore, Andre may be eligible for an additional prorated Direct Unsubsidized Loan of up to $1,500. [[Enrollment status changes]] If a student drops or adds a course after the school has originated a prorated loan, the school may readjust the loan amount but is not required to do so. Of course, a student who drops courses must still be enrolled at least half time to be eligible for any loan amount. FREQUENCY OF ANNUAL LOAN LIMITS ------------------------------------ The annual loan limit for Direct Loans limits how much a student can borrow in a single academic year. Once the student has reached the annual loan limit, he or she cannot receive another Direct Loan until he or she begins another academic year. There are two types of academic year a school can use in determining when another year will begin for the student: a scheduled academic year (SAY) or a borrower-based academic year (BBAY). Only term-based credit- hour programs can use SAYs. Clock-hour and nonterm credit-hour programs must use BBAYs. If a program at a term-based credit-hour school contains fewer than 30 weeks of instructional time in a year (unless the Department grants a waiver for an academic year of less than 30 weeks), the school must use only SAYs for borrowers in that program. Scheduled Academic Year An SAY is a fixed period of time that generally begins and ends at the same time each calendar year (for example, beginning on the first day of the fall semester and ending on the last day of the spring semester). The SAY generally corresponds to the academic year or calendar that is published in the school's catalog or other materials. An SAY must meet the statutory requirements of an academic year, as described in Chapter 3. [[Summer terms]] For a program that uses SAYs, a summer term may be part of the academic year that preceded that term (that is, it may be a "trailer"), or it may be part of the academic year that follows that term (that is, it may be a "leader"). The school can - use a strict policy that summer terms are always either trailers or leaders, - determine whether a summer term is a trailer or leader on a program-by-program basis, or - determine whether a summer term is a trailer or leader on a case- by-case basis. Summer mini-sessions can be grouped together as a single trailer or leader, or they can be treated separately and assigned to different SAYs. If the summer mini-sessions are grouped and treated as a single term, the summer cost of attendance cannot include costs for a mini-session for which the student was not enrolled. Borrower-Based Academic Year A BBAY is not a set period like an SAY; instead, the BBAY's beginning and end dates depend on an individual student's enrollment and progress. For example, a school that has new students beginning enrollment every month might use a BBAY for each student that begins in the month the student enrolls, rather than using an SAY that begins in the fall regardless of when the student actually begins classes. Like an SAY, the BBAY must meet the minimum statutory requirements for an academic year (see the next page for one exception to this requirement for term-based credit-hour programs). As noted previously, a school must use BBAYs for clock-hour and nonterm credit-hour programs. A school may choose to use a BBAY instead of an SAY for a term-based credit-hour program unless the program contains fewer than 30 weeks of instructional time in a year; in this case, as mentioned earlier, the school must use an SAY for the program. [[Term-based credit-hour programs]] For a term-based credit-hour program, the school can use BBAYs for all its students or just for students enrolled in certain programs, or it may use BBAYs on a student-by-student basis. The school can also alternate BBAYs with SAYs for a student, but the academic years must not overlap. A school that has these choices for academic year standards must have a written policy that explains how it applies these options when calculating loan eligibility. The BBAY must include the same number of terms as the SAY the school would otherwise use (not including any summer trailer or leader). The BBAY may include terms and/or mini-sessions the student does not attend if the student could have enrolled at least half time in those terms or mini-sessions; however, unlike an SAY, the BBAY must begin with a term in which the student actually enrolled. Also, any mini-sessions (summer or otherwise) that run consecutively must be combined and treated as a single term. If the BBAY includes a summer term, the BBAY need not meet the 30- week minimum requirement for an academic year. [[Clock-hour programs, nonterm programs]] For a clock-hour or nonterm program, the BBAY begins when the student enrolls. Because a BBAY must meet the minimum statutory requirements for an academic year, the BBAY must contain at least 30 weeks of instructional time and the appropriate number of credit or clock hours (24 semester or trimester hours, 36 quarter hours, or 900 clock hours). The BBAY does not end until the student has completed the number of weeks AND the number of hours in the academic year. A student who is attending less-than-full time will take longer to complete the academic year than a full-time student. Eligibility for Further Loans In general, once the student has reached the annual loan limit, he or she cannot receive another Direct Loan until he or she begins a new academic year. A student who has already received one Direct Loan within an academic year may receive another loan if he or she has not yet reached the annual limit. In addition, a student who has already borrowed up to the annual limit within an academic year can receive another loan if his or her annual limit is increased, either because he or she progresses to a grade level with a higher limit or because his or her dependency status changes to independent. In all cases, the student may borrow the difference between the amount already borrowed within the academic year and the student's loan limit. Note that for a nonterm program, the student will never progress to a higher grade level within an academic year, and thus will only have a change in the loan limit if his or her dependency status changes. The student only moves to a higher grade level when he or she completes the BBAY. INTEREST RATES ----------------- The interest rates for Direct Subsidized and Unsubsidized Loans are the same, but the Department does not charge interest to Direct Subsidized Loan borrowers during the in-school, grace, and deferment periods. Direct Unsubsidized Loan borrowers are responsible for interest during all periods, including in-school, grace, and deferment periods. The Department also does not subsidize Direct PLUS Loans; borrowers are responsible for all interest, including that which accrues during the student's in-school period and during periods of deferment for the parent. All borrowers are charged interest during forbearance periods. Interest rates are variable; legislation caps them at 8.25% for Direct Subsidized and Unsubsidized Loans and at 9% for Direct PLUS Loans. Interest rates are determined on June 1 each year and apply to the following 12-month period from July 1 to June 30. [[Subsidized and Unsubsidized Loans: two interest formulas]] Currently, there are two formulas for calculating the variable interest rate for Direct Subsidized and Unsubsidized Loans: - For loans first disbursed between July 1, 1995 and June 30, 1998 that are in in-school, grace, or deferment periods, the interest rate equals the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction before June 1, plus 2.5 percentage points. The rate for these loans for July 1, 1997 through June 30, 1998 is 7.66%. - For loans first disbursed between July 1, 1995 and June 30, 1998 that are not in in-school, grace or deferment periods, the interest rate equals the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction before June 1, plus 3.1 percentage points. The rate for these loans for July 1, 1997 through June 30, 1998 is 8.25%. Note that this formula is also used for any Direct Subsidized or Unsubsidized Loan first disbursed before July 1, 1995, in any period. [[Direct PLUS]] Currently, the interest rate for Direct PLUS Loans equals the bond equivalent rate of the 52-week Treasury bills auctioned at the final auction before June 1, plus 3.1 percentage points. The rate for these loans for July 1, 1997 through June 30, 1998 is 8.98%. [[Future change in interest rate calculations]] Beginning July 1, 1998, interest rate calculations change. For Direct Subsidized and Unsubsidized Loans first disbursed on or after July 1, 1998, the interest rate will equal the bond equivalent rate of the security with a comparable maturity, that the Department will establish, plus 1 percentage point. The rate will still be determined on June 1 each year and apply to the following 12-month period from July 1 to June 30. The rate will not exceed 8.25%. This interest rate calculation applies whether or not a loan is in an in-school, grace, or deferment period. The same calculation applies to Direct PLUS Loans first disbursed on or after July 1, 1998, except the rate will equal the bond equivalent rate of the security with a comparable maturity, that the Department will establish, plus 2.1 percentage points. The rate will not exceed 9%. Specific information on which securities' bond equivalent rates will be used was not available at the time this Handbook went to print. The Department will issue further guidance on this topic at a later date, in the form of a "Dear Colleague" Letter. When issued, this up-to-date information will also be available on the SFA BBS. During certain periods, borrowers may choose to pay the interest for which they are responsible: - Direct Subsidized Loan borrowers may choose to pay interest as it accrues during forbearance. - Direct Unsubsidized Loan borrowers may choose to pay interest as it accrues during in-school, grace, deferment, and forbearance periods. - Direct PLUS Loan borrowers may choose to pay interest as it accrues during deferments or forbearance. [[Capitalizing interest]] If borrowers choose not to make interest payments during applicable periods, the interest is capitalized, that is, added to the borrower's loan principal. - Interest that accrues and is not paid on a Direct Subsidized loan during forbearance is capitalized when that period ends. - Interest that accrues and is not paid on a Direct Unsubsidized Loan before the loan enters repayment is capitalized when the loan enters repayment. - Interest that accrues and is not paid on a Direct Unsubsidized Loan or Direct PLUS Loan during a period of deferment or forbearance is capitalized when that period ends. Accrued interest is capitalized annually for Direct Subsidized and Unsubsidized Loans repaid under the Income Contingent Repayment (ICR) Plan (or under an alternative repayment plan) when the borrower's payments are not high enough to cover the interest amounts that accrue. The amount of interest that may be capitalized in such cases is limited. (See page 11-28 for more information on repayment plans and 11-32 for more information on ICR capitalization.) The Department may capitalize unpaid interest on any Direct Loan that defaults. Capitalizing interest increases the loan's principal balance, the interest that must be paid during repayment, and the total amount the borrower will pay over the life of the loan. ADDITIONAL BORROWING COSTS ------------------------------ [[Loan fees]] The Department charges a loan fee of 4% of the principal for any Direct Loan (except a Direct Consolidation Loan) and deducts this fee from the loan proceeds. A prorated portion of the fee is deducted from each disbursement. If the loan is canceled or the loan amount is adjusted downward within 120 days of disbursement, the Department cancels or reduces the loan fee attributable to the disbursement portion repaid. A school that learns it should have canceled, but did not cancel, a borrower's loan proceeds within 120 days of disbursement should identify all affected loan records and report the date the loan(s) should have been canceled. This action will ensure that borrowers will not be charged loan fees for which they should not be responsible. [[Late charge]] The Department can require borrowers to pay a late charge of up to six cents for each dollar of a required monthly payment (or portion of a payment) not paid within 30 days after the due date. Currently, the Department is not charging late fees. [[Collection charges]] On a Direct Loan not in default, the Department may require borrowers or endorsers to pay any costs, in excess of routine collection costs, incurred in collecting installments not paid when due. Such charges do not include routine costs of preparing letters or notices or making local or long-distance telephone calls. An example of a non-routine collection cost is the cost of processing checks returned for insufficient funds. On a Direct Loan in default, the Department requires borrowers and any endorsers to pay additional costs. GRACE PERIODS--DIRECT SUBSIDIZED AND UNSUBSIDIZED LOANS --------------------------------------------------------------- A six-month grace period begins the day after a Direct Subsidized or Unsubsidized Loan borrower ceases to be enrolled as at least a half- time student at an eligible school. During the grace period, Direct Subsidized Loan borrowers are not required to make payments on loan principal and are not charged interest. Direct Unsubsidized Loan borrowers are not required to make payments on loan principal but are responsible for the interest that accrues. A borrower who returns to school as at least a half-time student before the grace period ends may again postpone loan repayment while in school and will be entitled to a full grace period after terminating enrollment or dropping below half-time status. Once a borrower's grace period expires, he or she must request, and be granted, a deferment or forbearance in order to postpone payments on a Direct Subsidized or Unsubsidized Loan. (See "Deferment" on page 11-34 and "Forbearance" on page 11-37.) The grace period for a Direct Subsidized or Unsubsidized Loan borrower enrolled in a correspondence program begins on the earliest of the date - the borrower completes the program, - the borrower falls 60 days behind the due date for submitting a scheduled assignment,3 or - that is 60 days following the latest allowable date the school establishes for completing the program. A Direct PLUS Loan borrower does not receive a grace period. 3 Schools have the authority to allow one restoration of in-school status for borrowers who are 60 days late submitting a correspondence assignment. The borrower is required to state in writing, within the 60-day period, that he or she intends to continue in the program. The written statement also must show the borrower understands that required lessons must be submitted on time. REPAYMENT ----------- [[Direct Subsidized and Direct Unsubsidized Loans]] The loan repayment period for Direct Subsidized Loans and Direct Unsubsidized Loans begins the day after the grace period ends. At that point, all borrowers become responsible for paying the principal and interest. The first payment is due within 60 days of the start of the repayment period. [[Direct PLUS Loans]] The repayment period for Direct PLUS Loans begins the day the loan is fully disbursed. The first payment of principal and interest is due within 60 days after the final loan disbursement. All loan payments are applied in this order: (1) accrued charges and collection costs, (2) outstanding interest, and (3) outstanding principal. [[Repayment plans]] Direct Subsidized and Unsubsidized Loan borrowers may repay their loans through one of the following repayment plans: - the Standard Repayment Plan, - the Extended Repayment Plan, - the Graduated Repayment Plan, - the Income Contingent Repayment Plan, or - an alternative repayment plan Direct PLUS Loan borrowers may choose from any of these plans except Income Contingent Repayment. In general, 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 or Direct PLUS Consolidation Loan separately from other Direct Loans. The Repayment Book explains repayment plans in detail. Shortly before a loan enters repayment, the borrower receives information from the Department's Direct Loan Servicing Center about the various repayment plans (including the estimated amounts the borrower would pay under each plan) and a request that the borrower select a plan. Borrowers who fail to choose are automatically placed in the Standard Repayment Plan. The time a borrower's loan is in repayment will vary depending on the total amount owed and the repayment plan selected. [[This file contains the chart "Direct Loan Program Repayment Plans" on page 11-30 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]] [[Standard Repayment]] With Standard Repayment, borrowers make fixed payments of at least $50 a month for up to 10 years. The Standard Repayment Plan may result in the lowest amount of interest paid because the repayment period is shorter than it would be under the other plans. In general, the shorter the repayment period, the lower the total interest a borrower pays over the life of the loan. [[Extended Repayment]] With Extended Repayment, borrowers make fixed payments of at least $50 a month over a period ranging from generally 12 to 30 years, depending on the total amount borrowed. For lower loan amounts, the repayment period may be less than 12 years because a borrower must make payments of at least $50 a month. Extended/Graduated Repayment Amount of Debt Repayment Period May Not Exceed Less than $10,000 Generally 12 years $10,000--$19,999 15 years $20,000--$39,999 20 years $40,000--$59,999 25 years $60,000 or more 30 years [[Graduated Repayment]] With Graduated Repayment, borrowers' payments start out low, then increase every two years. The repayment period will vary from generally 12 to 30 years, depending on the total amount borrowed. Under Graduated Repayment, the minimum monthly payment is either the interest that accumulates between payments or one-half the payment a borrower would make using the Standard Repayment Plan, whichever is larger. However, a borrower's monthly payment will never increase to more than one-and-one-half times what the borrower would pay under Standard Repayment. Generally, the amount a borrower repays over the life of the loan will be higher under Graduated Repayment than under Extended Repayment. However, Graduated Repayment has the advantage of offering lower monthly payments during the early portion of a borrower's career when the borrower's income is likely to be lower. [[Income Contingent Repayment]] The Income Contingent Repayment (ICR) Plan allows Direct Subsidized and Unsubsidized Loan borrowers to make monthly payments based on annual income and the amount of outstanding Direct Subsidized and Unsubsidized Loans. (As mentioned earlier, ICR is not available to repay Direct PLUS Loans.) To participate in the ICR Plan, a borrower (and, if married, the borrower's spouse) must sign a form that permits the Internal Revenue Service to inform the Department of certain tax return information, such as adjusted gross income (AGI). Each year, the Department uses the borrower's (and spouse's) information to calculate the borrower's monthly payment. [[Alternative documentation]] In certain circumstances, the Department can require alternative documentation of income from borrowers and, if married, their spouses. In fact, the Department will require alternative documentation from borrowers in their first year of repayment. This documentation includes pay stubs, canceled checks or, if these are unavailable, signed statements explaining the borrowers' income sources. Borrowers also can submit alternative documentation to request that their monthly payments be adjusted in special circumstances--for example, if the borrower (or spouse) becomes unemployed. See the Repayment Book for more information on alternative documentation. [[ICR repayment period]] The maximum repayment period is 25 years. If the borrower has made payments under the Standard Plan or the 12-year Extended Plan and then switches to the ICR Plan, those earlier payment periods are counted toward the 25-year repayment period. Earlier payment periods in other plans do not count toward the 25-year period. If the borrower has not repaid the loans after 25 years under ICR, the unpaid portion is discharged (canceled); however, currently the borrower must pay taxes on the discharged amount. Monthly payments are recalculated annually. Borrowers pay the lesser of - the amount that would have been paid if the borrower repaid the loan in 12 years, multiplied by an income percentage factor that varies with the borrower's annual income; or - 20% of the borrower's discretionary income, which is the borrower's AGI minus the poverty level for his or her family size; the poverty level is determined by published U.S. Department of Health and Human Services guidelines. If income is less than or equal to the poverty level for the borrower's family size, the monthly payment will be zero. If the calculated monthly payment is greater than zero but less than $5, borrowers are required to make a $5 monthly payment. If the monthly payment is calculated as more than $5, borrowers must pay the actual calculated payment amount. [[ICR--capitalization of interest]] As noted previously, if monthly payments under ICR do not cover accruing interest, the unpaid interest is capitalized once each year. If capitalization increases the outstanding principal the borrower owes to 10% more than the original principal owed when the repayment period began, interest will continue to accumulate but will not be capitalized. The limit on the amount of interest capitalized under ICR does not apply during any periods of forbearance or during periods of deferment for Direct Unsubsidized Loans. The Department can designate the ICR Plan for a borrower who defaults. [[Alternative repayment plan]] The Department may provide an alternative repayment plan if the borrower can demonstrate satisfactorily that the other repayment plans' terms and conditions are not adequate for his or her exceptional circumstances. The Department may require evidence of exceptional circumstances. The repayment period under an alternative repayment plan may not exceed 30 years from the date the Direct Loan enters repayment. The maximum time frame to repay does not include periods of deferment or forbearance. The terms under which interest is capitalized are the same as for the ICR Plan. If a borrower is permitted to use an alternative repayment plan, the Department notifies him or her in writing of the plan's terms. The borrower has the option to accept the plan or choose another. [[Switching repayment plans]] A borrower who decides the repayment plan selected no longer meets his or her needs can switch plans, as long as the new plan's maximum repayment period is longer than the period the borrower's loan has already been in repayment. The exception to this requirement is that a borrower can switch to ICR at any time. A borrower repaying a defaulted loan under ICR may not switch plans unless he or she - was required to make, and did make, a payment under ICR in each of the preceding three months; or - was not required to make payments but made three reasonable and affordable payments in each of the preceding three months. In either case, the borrower must submit a request to the Department to switch plans, and the Department must approve the request. [[Prepayments]] If a borrower pays any amount that exceeds the amount due, the excess is a prepayment. A Direct Loan borrower may prepay all or part of a loan at any time without penalty. A prepayment is applied first to any accrued charges or collection costs, then to any outstanding interest, and then to outstanding principal. If the amount of the prepayment equals or exceeds the monthly repayment amount under the borrower's repayment plan, the Department advances the next payment due date (unless the borrower requests otherwise) and notifies the borrower of the revised due date. Any refunds the Department receives from a school that are due a borrower are applied against the borrower's outstanding principal. The Department notifies the borrower of any refunds. Periods of authorized deferment or forbearance are not included in any repayment period. The actual number of payments a borrower makes or the fixed monthly repayment amounts may be adjusted over time to reflect changes in the variable interest rates. DEFERMENT ----------- A deferment is a period during which payments of principal on Direct Loans are postponed. No interest is charged Direct Subsidized Loan borrowers. Interest accrues and is charged Direct Unsubsidized Loan and Direct PLUS Loan borrowers, who may pay the interest during the deferment or have the interest added to the loan principal (capitalized) at the deferment's end. [[34 CFR 685.204]] Once repayment begins, a borrower meeting certain requirements is entitled to a deferment, although the borrower must request one from the Department. The borrower should continue making payments on the loan until he or she receives the Department's written notice of the deferment's approval. A deferment period begins when the condition that makes the borrower eligible for a deferment begins, such as the date the borrower becomes unemployed or enters study in a fellowship program. A deferment may be granted retroactively from the date of application for up to six months. [[Effect of default]] A borrower is not eligible for any deferments on a defaulted loan unless he or she has made payment arrangements satisfactory to the Department before the loan is transferred from the Direct Loan Servicing Center to the Department's Debt Collection Service. Borrowers should contact their Direct Loan Servicing Center to make such arrangements. In general (see the exception on page 11-36), there are five types of deferments authorized for Direct Loans: - in-school student status, - study in a graduate fellowship program, - study in an approved rehabilitation training program, - unemployment, and - economic hardship. Deferment provisions listed on existing promissory notes cannot be removed. Additionally, future legislation may provide for new deferment conditions that apply to all borrowers. [[In-school deferment]] A deferment for at least half-time study at an eligible school is referred to as an "in-school" deferment. Any school that meets the definition of an institution eligible to participate in SFA Programs-- whether or not the school is currently participating--is an eligible school for the purpose of an in-school deferment. However, if a school has never been approved as eligible to participate in any SFA Program, the Department must determine whether the school meets the definition of an eligible institution before the school may certify an in-school deferment. (See Chapter 3 for additional information on institutional eligibility requirements.) [[Internship/residency programs]] Borrowers in a residency program in dentistry may receive in-school deferments. Borrowers in medical internship or residency programs do not qualify but may qualify for an economic hardship deferment (see below). [[Graduate fellowships]] A borrower may receive deferments for study in a graduate fellowship program approved by the Department. [[Rehabilitation training]] Borrowers with disabilities may receive deferments for study in a rehabilitation training program approved by the Department. [[Unemployment]] A borrower seeking and unable to find full-time employment may obtain a deferment for up to three years. The borrower must submit the deferment request every six months, however, to affirm his or her continuing employment search. [[Economic hardship]] Borrowers experiencing economic hardship may be eligible for deferments, not to exceed three years, but must submit a deferment request every 12 months to affirm continuing eligibility. Any of the following criteria qualifies a borrower for an economic hardship deferment: - The borrower is receiving payment under a federal or state public assistance program. - The borrower is working full time and is earning a total monthly gross income that does not exceed the greater of (1) the minimum wage or (2) the poverty line for a family of two, as determined in Section 673(2) of the Community Service Block Grant Act. - The borrower is working full time and has an annual federal education debt burden that is at least 20% of the borrower's adjusted gross income. Defaulted loans are not included in the education debt burden unless the borrower has made satisfactory repayment arrangements (see Section 1). Additionally, the borrower's income minus the educational debt burden must be less than 220% of the greater of (1) the minimum wage rate or (2) the poverty line for a family of two. - The borrower is not working full time, and the borrower's total monthly gross income from all sources is less than twice the greater of (1) the minimum wage rate or (2) the poverty line for a family of two. In addition, after deducting the total monthly payments on federal education loans, the borrower's income from all sources may not exceed the larger of (1) the minimum wage rate or (2) the poverty line for a family of two. - The borrower has been granted an economic hardship deferment under the FFEL Program or the Federal Perkins Loan Program for the same period for which the borrower is requesting an economic hardship deferment under the Direct Loan Program. [[PLUS borrowers]] For Direct PLUS Loan borrowers, it is generally the parent--not the student--who must meet the criteria for deferment. For example, a Direct PLUS Loan borrower can receive an in-school deferment if he or she is enrolled at least half time in an eligible program of study at an eligible school. The parent is not eligible if only the student for whom the parent borrowed meets the requirements. However, as discussed below, a parent with an outstanding FFEL made before July 1, 1993 may also qualify for a deferment when a dependent student for whom the parent borrowed a PLUS Loan is enrolled in school. [[Deferments for borrowers with outstanding FFELs--34 CFR 685.204(d)]] If, at the time of application for a Direct Loan, a borrower has an outstanding balance of principal or interest on any FFEL made, insured, or guaranteed before July 1, 1993, the borrower is eligible for additional deferments. The deferments are those available to FFEL borrowers on loans made between July 1, 1987 and June 30, 1993. One of the additional deferments is for parents who have borrowed for dependent students. A parent qualifies for a deferment under this provision if a dependent student for whom he or she borrowed is still dependent and meets one of the following conditions: - The student is attending an eligible school full time. - The student is attending full time at an institution of higher education or a vocational school that is operated by an agency of the federal government. - The student is enrolled in an eligible graduate fellowship program or in an approved rehabilitation training program for the disabled. - The student is attending an eligible school half time and obtains a Federal Stafford Loan or a Direct Loan for the same enrollment period for which the parent is applying for a deferment. Note that this requirement differs from FFEL: Under FFEL, there are additional requirements the student must meet in order for the parent to receive this deferment (see Chapter 10, Section 5.) The other deferments available to borrowers with outstanding FFELs are - serving a required internship or residency; - temporarily totally disabled or required to provide full-time care for a disabled dependent; - teaching in a designated teacher shortage area; - serving in the Armed Forces, Peace Corps, Public Health Service, ACTION, or as a full-time volunteer for a tax-exempt organization; - active duty in NOAA Corps; - qualifying parental leave; and - working mother. See Chapter 10 for more information on these deferments. FORBEARANCE ------------- During a period of forbearance, a borrower may stop payments temporarily or make smaller payments than previously scheduled. The Department grants forbearance for a period of up to one year. Forbearance is renewable if the borrower requests it in writing and the Department approves the request. Although borrowers are relieved of paying principal during forbearance, interest continues to accrue. If the borrower does not pay the accruing interest during the forbearance period, the interest is capitalized after the forbearance ends (see page 11-26 for a discussion of capitalization). A borrower may receive forbearance if he or she is willing but unable to repay the loan. The borrower must request forbearance and provide appropriate documentation showing that he or she qualifies. The Department grants forbearance if - it determines that due to poor health or other acceptable reasons, the borrower or endorser is currently unable to make scheduled payments; - the borrower is in a medical internship or residency or dental residency that must be successfully completed before the borrower may begin professional practice or service, or the borrower is in a medical internship or residency program or dental residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or health-care facility that offers postgraduate training; - a Direct Subsidized or Unsubsidized Loan borrower is serving in a national service position for which the borrower is receiving a national service educational award under the National Community Service Trust Act of 1993 (Direct PLUS Loan borrowers are not eligible for this forbearance); or - the borrower's or endorser's monthly payments on federal education loans are equal to or greater than 20% of the borrower's or endorser's total monthly gross income (for not more than three years). [[Administrative forbearance]] In certain instances, the Department grants forbearance without requiring documentation from the borrower. These circumstances include but are not limited to - a properly granted period of deferment for which the Department later learns the borrower did not qualify; - a period for which payments are overdue at the beginning of a deferment; - the period from the time the borrower entered repayment until the first payment due date was established; - the period prior to a borrower's filing a bankruptcy petition; - a period after the Department receives reliable information indicating the borrower (or the student in the case of a parent's Direct PLUS Loan) has died or become totally and permanently disabled--until the Department receives documentation verifying those conditions; or - a period necessary for the Department to determine a borrower's eligibility for discharge (cancellation) under the bankruptcy, closed school, or false certification provisions (see "Discharge" below). Under certain circumstances, a borrower may qualify for forbearance without submitting documentation. For example, forbearance may be granted when the effect of a variable interest rate on a repayment schedule extends repayment past the maximum repayment term. A borrower affected by a natural disaster does not have to sign a forbearance agreement but can simply phone his or her Direct Loan Servicing Center to request forbearance. Borrowers may also receive forbearance due to a national military mobilization but must provide supporting documentation. The Department may grant forbearance to borrowers whose loans are delinquent or in default. DISCHARGE ----------- Under certain conditions, all or a portion of a borrower's loan debt may be canceled or "discharged." Discharge provisions apply to death or total and permanent disability, bankruptcy, closed schools, and falsely certified loans. Discharged loans do not count against the borrower's annual or aggregate Direct Subsidized Loan or Direct Unsubsidized Loan limits. [[Death and disability]] If a borrower dies or becomes totally and permanently disabled, the Department discharges the borrower's and any endorser's obligation to make further loan payments. A Direct PLUS Loan borrower's (or endorser's) debt also will be discharged if the student for whom the parent borrowed dies. The parent (and any endorser) continues to be obligated to repay a Direct PLUS Loan if the student becomes totally and permanently disabled. A borrower is not considered totally and permanently disabled based on a condition that existed when the borrower applied for the loan, unless the borrower's condition substantially deteriorated after the loan was made. [[Bankruptcy]] If a borrower's obligation to repay a Direct Loan is discharged in bankruptcy, the Department does not require the borrower to make any further payments on the loan. An SFA loan is not dischargeable in bankruptcy, however, unless the debt has been outstanding for at least seven years--excluding any deferment or forbearance periods--or unless the bankruptcy court has determined that repaying the debt would cause the debtor and his or her dependents undue hardship. Note that Direct PLUS Loan endorsers ARE required to repay a loan that the borrower has discharged in bankruptcy. [[Closed school discharge--34 CFR 685.213]] Direct Subsidized or Unsubsidized Loans may be discharged if borrowers are unable to complete their programs of study because their schools closed or because the borrowers withdrew not more than 90 days before their schools closed. If one of these conditions applies to the student for whom a parent borrowed a Direct PLUS Loan, the parent's loan will be discharged. The Department discharges the obligation of the Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loan borrower (and any endorser) and reimburses the borrower for any amounts already paid. [[False certification/unauthorized payment discharge--34 CFR 685.214]] A Direct Subsidized or Unsubsidized Loan may be discharged if the school falsely certified the borrower's eligibility or made an unauthorized payment. If one of these conditions applies to the student for whom a parent borrowed a Direct PLUS Loan, the parent's loan will be discharged. A school is considered to have falsely certified the loan if it - falsely certified that a student had the ability to benefit from its training, - signed the borrower's name on the loan application or promissory note without the borrower's authorization, or - certified the eligibility of a student who would not meet employment requirements (in the student's state of residence at the time the loan was originated) in the occupation for which the training program was intended. A student would not meet employment requirements because of a physical or mental condition, age, a criminal record, or other reason acceptable to the Department. A school makes an unauthorized payment if it endorsed the borrower's loan check (or signed the borrower's authorization for Electronic Funds Transfer) without the borrower's authorization, unless the loan proceeds were delivered to the student or applied to charges the student owed the school. If a borrower meets the requirements for a discharge because of false certification or unauthorized payment, the Department discharges the borrower's and any endorser's obligation to make further loan payments and reimburses the borrower for any amounts already paid. Interest and collection fees, as well as loan principal, will be discharged. The Department may attempt to collect from the school the loan amount discharged, including any refund owed the student. If otherwise eligible, a borrower whose defaulted loans are discharged under these provisions regains eligibility for SFA funds. In addition, any adverse credit history will be deleted from credit- reporting agencies' records. [[Payments after discharge]] The Department returns to the sender (or to the borrower's estate) any payments received after a borrower's loan has been discharged. DEPARTMENT OF DEFENSE REPAYMENT ----------------------------------- The Department of Defense (as an enlistment incentive) will repay a portion of a student's Direct Loan if the student serves as an enlisted person in certain specialities in the U.S. Army, the Army Reserves, the Army National Guard, or the Air National Guard. For more information, the student should contact his or her local Army or Air National Guard recruiting office. This benefit does not pertain to an individual's prior military service. BORROWER DEFENSES -------------------- [[34 CFR 685.206(c)]] A borrower may assert a defense against repaying a Direct Loan based on any act or omission by his or her school that would give rise to a cause of action against the school under applicable state law. The borrower may assert the defense in any proceeding to collect on a Direct Loan. Collection proceedings include, but are not limited to, tax-refund offset proceedings, wage garnishment proceedings, salary offset proceedings for federal employees, and credit bureau reporting proceedings. If the borrower's defense is successful, the Department notifies the borrower in writing that he or she is relieved of the obligation to repay all or part of the loan and associated costs and fees. The Department may give the borrower further relief, as deemed appropriate, based on the borrower's circumstances. Further relief may include but is not limited to - reimbursing the borrower for amounts paid toward the loan voluntarily and through enforced collection, - determining that the borrower is not in default on the loan and is eligible to receive assistance from SFA funds, and - updating information to credit bureaus in cases where the Department had made adverse credit reports about the borrower's Direct Loan. A successful borrower's defense may result in the Department requiring the school to repay the funds and purchase the loan.

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