Skip Nav

AwardYear: 1995-1996 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 2 SectionTitle: Making & Disbursing Loans PageNumbers: 13-24 [[Definition of making a loan]] A loan is considered to be "made" when the borrower signs for the advance AND the funds are disbursed. A borrower must sign for each advance AT THE TIME he or she receives each disbursement. It is not acceptable practice for the student to sign in advance of receipt of the funds. [[Financial need- Other resources/Maximum loan eligibility]] As discussed in Chapter Five, a financial aid administrator may not award or disburse a Federal Perkins Loan or NDSL to a student if that loan, when combined with all other resources, would exceed the student's need. The aid administrator must take into account those resources that he or she can reasonably anticipate at the time aid is awarded to the student, those the school makes available to its students, or those the aid administrator knows about. A list of resources and a discussion of overawards are included in Chapter Five, Section Two. [[Uniform cash management regulations]] General information about the methods of disbursing funds to a student, crediting a student's account, allowable charges, and holding student loans is included in the General Provisions Final Rule published in the Federal Register on December 1, 1994. The new regulations, effective July 1, 1995, provide uniform cash management rules for the SFA programs and apply to the 1995-96 and subsequent award years. These provisions are discussed in Chapter Three, Section Three-"Cash Management." The major provisions that affect the disbursement of Federal Perkins Loans, effective beginning July 1, 1995, are discussed on page 6-21. LOAN MAXIMUMS [[General loan maximums]] If a student is attending a school that does NOT participate in the Expanded Lending Option (ELO) of the Federal Perkins Loan Program, the maximum annual amount an eligible student may borrow is- - $3,000 per year for a student who has not successfully completed a program of undergraduate education or - $5,000 per year for a graduate or professional student. The maximum cumulative amount an eligible student may borrow at schools that do NOT participate in the ELO is- - $15,000 for a student who has not successfully completed a program of undergraduate education or - $30,000 for a graduate or professional student, including loans borrowed as an undergraduate student. [[Expanded Lending Option(ELO)]] A school that maintains a cohort default rate of 15 percent or less may participate in the ELO if the school has signed an ELO participation agreement with ED (cohort default rates are discussed in Section Eight of this chapter). Schools participating in the ELO are required to match the Federal Capital Contribution (FCC) on a dollar-for-dollar basis and may make loans to students at higher award-year and cumulative loan limits than is the case with nonparticipating schools. [[Loan limits at ELO schools]] If a student is attending a school that participates in the ELO, the maximum annual amount the student may borrow, effective July 1, 1993, is- - $4,000 per year for a student who has not successfully completed a program of undergraduate education or - $6,000 per year for a graduate or professional student. The maximum cumulative amount an eligible student may borrow at schools that participate in the ELO, effective July 1, 1993, is- - $20,000 for a student who has successfully completed 2 years of a program leading to a bachelor's degree, but who has not completed the work necessary for the degree; - $40,000 for a graduate or professional student, including loans borrowed as an undergraduate student; or - $8,000 for all other students. [[Repayment does not establish new loan limit]] All of the cumulative maximum amounts listed here include all Defense Loans, NDSLs, and Federal Perkins Loans a borrower may have. Unlike the Federal Family Education Loan Program, repayment does not establish a new cumulative loan limit. For example, a student who had borrowed $30,000 (or $40,000 at an ELO school) while earning bachelor's and master's degrees would not be eligible for a new loan for a doctoral program, even though the student had repaid part or all of the $30,000 (or $40,000). [[Study abroad]] Students engaged in programs of study abroad are eligible for loans from the Federal Perkins Loan Program; the annual and aggregate loan limits listed above may be exceeded by 20 percent for study abroad in programs approved for credit by the home school where the student is enrolled if reasonable costs of the program exceed the cost of attending the home school. [[Loans limits for teaching certificate students]] A student enrolled in a teacher certification program may be considered either an undergraduate or graduate student, depending on the school's policy. That decision is left to the school. If the school considers such students graduate students, and the school has a student who has already borrowed $15,000 (or $20,000 at a school participating in ELO), that student is still eligible to receive an additional Federal Perkins Loan or NDSL. If the school considers these students to be taking undergraduate courses, the student who has already borrowed $15,000 (or $20,000) would not be able to receive an additional loan. COUNSELING STUDENTS BEFORE MAKING THE FIRST FEDERAL PERKINS LOAN OR NDSL DISBURSEMENT, the school must have the student sign the promissory note (see "The Promissory Note" in Section Two of this Chapter), and MUST furnish each student with certain information-each student must be informed about his or her rights and responsibilities under the Federal Perkins Loan Program. The student must be informed that the loan may be used only for educational expenses, and that he or she must repay it. The school should also make sure the student knows that the SCHOOL holds the promissory note. [[School must provide certain information]] A school must also provide the student with the following information in writing before making the first loan disbursement: 1. the name of the school and the address where communications and payments should be sent; 2. the principal amount of the loan and a statement that the school will report the outstanding balance of the loan to a national credit bureau at least annually (see Section 674.16(a)(1)(ii) of the November 30 Final Rule); 3. the stated interest rate on the loan; 4. the maximum yearly and cumulative amounts the student may borrow; 5. an explanation of when the student must start repayment, and when he or she must begin paying the interest that accrues; 6. the maximum and minimum repayment terms the school may impose, and the minimum monthly repayment required; 7. a statement of the total cumulative balance owed by the student to that school and an estimate of the monthly payment amount needed to repay that balance; 8. options the borrower may have to consolidate or refinance the loan; 9. the borrower's right to prepay all or part of the loan at any time without penalty; 10. a summary of circumstances in which repayment of the loan principal or interest may be deferred or cancelled, including a brief notice about the Department of Defense program for repaying loans based on certain military service; 11. a definition of default and the consequences to the borrower, including a statement that the school may report the default to a national credit bureau (see Section 674.16(a)(1)(x) of the November 30 Final Rule); 12. the effect of accepting the loan on the borrower's eligibility for other types of student aid; 13. a complete list of charges connected with making the loan, including whether those charges are deducted from the loan, or the student must pay them separately; and 14. an explanation of the costs that may be assessed the student in collecting the loan, such as late charges and collection and litigation costs. The school must provide this information to the student-in writing-as part of the application material, as part of the promissory note, or on a separate form. While the information can be mailed to students, it is preferable for the aid administrator to meet with them to answer their questions and to emphasize their responsibility to repay their loans. [[Obtain information from students]] The school is encouraged to use this initial counseling session to obtain the following information from students, which could be valuable later for use in collection procedures: - student's name, current address, and Social Security number; - parents' permanent address; - telephone numbers of the student and his or her parents; - expected date of graduation; - spouse's name and address; - spouse's employer; - names and addresses of two or three personal acquaintances; and - student's drivers license number, if any. This information will help locate students who leave school without notice or who do not attend the exit interview. Effective "pre-loan" counseling sessions will satisfy the requirement to tell each borrower about his or her rights and obligations and provide information about the requirement to repay a loan. However, this counseling may not be used to satisfy the requirement for an exit interview. (See Section Six of this Chapter for more information.) THE PROMISSORY NOTE The promissory note is the legally binding document that is evidence of a borrower's indebtedness to a school. A student must sign this note before he or she can receive any Federal Perkins funds and must be given a copy of the note at (or before) the exit interview. The note includes information about the interest rate on the loan, repayment terms, minimum rates of repayment, deferment and cancellation provisions, and late charges. [[Sample notes in "Dear Colleague" letter CB-93-9 ED issued promissory note information and new sample promissory notes in "Dear Colleague" letter CB-93-9, dated July 1993. These notes include the current deferment and cancellation provisions as well as other changes required by the Higher Education Amendments of 1992. A school MUST use a promissory note which the Secretary has approved. A school's promissory note must incorporate the provisions of the Higher Education Amendments of 1992. [[Credit bureau reporting]] In addition, beginning with the 1995-96 award year, a promissory note must state that the school is required to disclose to any one of the national credit bureaus with which ED has an agreement the amount of the loan made to the borrower along with other relevant information. The note must also state that if the borrower defaults on the loan, the school is required to disclose to the same national credit bureau to which it originally reported the loan that the borrower has defaulted on the loan along with other relevant information (see Section 674.31(b)(10)). Since the 1993-94 award year, a school has been required to provide this information to a borrower in writing but not necessarily on the promissory note. [[Minor who signs note is responsible for repayment]] The Higher Education Amendments of 1992 eliminated the "defense of infancy" whereby the signing of a contract by a minor would not create a binding obligation. Under this provision of the law, a minor may sign a promissory note without an endorser or security, and the minor who signs is responsible for repayment, regardless of any state law to the contrary. If the lending institution does not have a valid note or other written evidence that would be upheld in a court of law, the institution has no recourse against a borrower who defaults. In such cases, the school would have to repay to its Federal Perkins Loan Fund any amounts loaned as well as any administrative cost allowance claimed on those amounts. Two examples of invalid notes are notes that have been changed after they were signed and notes without proper signatures or dates for loan advances. There are two sample notes for Federal Perkins Loans: one for borrowers attending at least half time and one for borrowers attending less than half time. Two other notes are for NDSLs- again, one note for borrowers attending at least half time, one for borrowers attending less than half time. Using two sets of notes will avoid confusion over which provisions apply to which borrowers. Once a student has been categorized as a Federal Perkins Loan or NDSL borrower, the provisions of the appropriate promissory note will continue with that borrower for the life of the loan. SCHOOL-DESIGNED NOTE [[Optional provisions]] A school may develop its own notes, which may include some or all of the optional provisions. However, a school-designed note must include all of the required information and must be based on the sample notes provided in "Dear Colleague" letter CB-93-9. The school may not change the text or the order of the text in the ED- provided notes. Thus, the signature for advances and the signature must be at the end of the note. The school may add such information as the student's driver's license number to the note. There is no minimum size of type or print specified for the notes. However, the notes must be legible so that a borrower would not be able to claim a defense against repayment of the loan because the print was too small to be readable. [[Minimum monthly repayment option]] Optional provisions regarding a minimum monthly payment are included in both of the sample Federal Perkins and NDSL notes (bracketed paragraphs III(5)(A) and III(5)(B)), and a school may choose to include these provisions. However, a school must either include both paragraphs or omit both paragraphs. If the school includes both paragraphs in the promissory note, the note must state the exact amount of the minimum monthly payment amount. If the school does not include the minimum monthly payment option in the note, the school may not require a minimum monthly payment amount from the borrower. If the optional provisions are included in the school's note, a monthly minimum amount of $40 is required for loans made on or after October 1, 1992, to borrowers who have no outstanding balance on a Federal Perkins Loan, NDSL, or Defense loan. (For other borrowers, the monthly minimum amount remains $30.) If a school is developing its own notes, it may use either "open ended" or "closed-end" ("limited") notes. A note may be printed on more than one sheet of paper if the borrower signs each page, or if each page contains the number of that page plus the total number of pages in the note (for example, page 1 of 3, page 2 of 3). [[Closed-End valid for 12 months--contains loan amount]] - "Closed-End" or "Limited" Note: This note is valid for not more than 12 months and usually covers one award year or one academic year. The amount of the loan must be entered in the note. Closed-end notes can be designed for a single disbursement (if the award is less than $501) or multiple disbursements. If a school uses multiple disbursements, the borrower must sign for each advance. If there will be only one disbursement, the borrower's signature at the end of the note is sufficient. [[Open-Ended does not contain loan amount]] - "Open-Ended" Note: The sample notes in "Dear Colleague" letter CB-93-9 are open-ended notes. An open-ended note does not itself contain the specific amount of the approved loan. Instead, at the time of each disbursement, the school must enter the amount advanced and the date of receipt in the "Schedule of Advances," which is made a part of the note. The borrower must sign this Schedule EACH TIME he or she receives a disbursement. IT IS NOT ACCEPTABLE PRACTICE FOR THE STUDENT TO SIGN IN ADVANCE. If a school uses an open-ended note, it does not have to issue new notes for future loans it makes to the same borrower, UNLESS the requirements of the Federal Perkins Loan Program are changed by statute or regulation. An open-ended note may be used for several years. Below is an example of a Schedule of Advances in an open-ended note: [[The promissory note example on page 6-20 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Return original note to borrower when loan is paid in full]] When a borrower has repaid a loan, the school must mark the note "Paid in Full," have it certified by an official of the school, and give the original note to the borrower. The school must keep a copy of the note for at least five years after the date the loan was repaid in full. DISBURSING FUNDS A school may not disburse funds for a payment period until the student enrolls for that period. As discussed in the Introduction to Chapter Five, the General Provisions Final Rule published in the Federal Register on December 1, 1994 provides uniform cash management rules for all SFA programs. The provisions of the Final Rule, as they affect all SFA programs, are discussed in this handbook in Chapter Three, Section Three. The major provisions that affect the disbursement of Federal Perkins Loans, effective beginning July 1, 1995, are the following: [[Notification of funds to be received]] - A school must notify a student or parent of the amount of funds the student can expect to receive from SFA programs, and how and when those funds will be paid. [[EFT transfer]] - A school may choose to pay a student by electronic funds transfer (EFT) to the bank account designated by the student; however, the school must obtain an authorization from the student to disburse by EFT. [[Early payment of a Perkins Loan]] - The earliest a school may PAY DIRECTLY OR CREDIT THE ACCOUNT of an enrolled student is 10 DAYS before the first day of a payment period or period of enrollment; this provision is included in Section 668.165(c) of the December 1, 1994 Final Rule. A school may no longer credit the account of an enrolled student up to 3 weeks before the first day of classes. [[Allowable charges when crediting a student's account]] - When a school disburses SFA funds by crediting a student's account, the school may assess only the following "allowable charges": (1) charges for tuition and fees; (2) charges for room and/or board if the student contracts with the school for room and/or board; (3) if the school obtains the permission of the student or parent, other cost-of-attendance charges included in the HEA (refer to the discussion in Chapter Three, Section Three). [[Rules for maintaining SFA program funds]] - The Final Rule also includes new provisions that apply to bank accounts containing SFA funds, such as the criteria for determining whether a school must keep SFA program funds in an interest-bearing account, and the criteria for requiring some schools to keep SFA funds in a separate bank account that contains no other funds. A detailed discussion of the new provisions is in Chapter Three, Section Three. The school must report the disbursement and amount of each Federal Perkins Loan or NDSL to a national credit bureau with which ED has an agreement. See Section Ten, "Credit-Bureau Reporting" for further details on complying with this requirement. Keep in mind that if a school makes payments before the student begins attendance, it must accept the responsibility resulting from any overpayment. If a student should withdraw-or be expelled- before the first day of classes, for example, all funds disbursed are considered an overpayment and must be restored to the Federal Perkins Loan Fund. A student who never begins class is considered to have withdrawn. [[Power of attorney]] A school official may not obtain a student's power of attorney to endorse any check used to disburse funds or to sign for any loan advance unless ED has granted prior approval. Such a power of attorney (to allow a school to act on behalf of a student) would not be granted by ED unless the school could demonstrate that there is no one else who could act on behalf of the student (such as a relative, landlord, or member of the clergy, for example). [[Part of loan each payment period at standard term schools]] If a school is making a loan for a full academic year and the school uses standard academic terms, it must advance a portion of the loan during each payment period. Payment periods are defined as semesters, trimesters, or quarters. The amount to be advanced is usually determined by dividing the award by the number of payment periods in the academic year. [[Pay at least twice a year at non-standard term schools]] If the school does not use standard academic terms, it must advance funds at least twice during the academic year-once at the beginning and once at the midpoint. Normally, no more than half the loan may be advanced before the midpoint. A school must also advance funds at least twice during an eligible six-month training program. For a student attending less than a full academic year, the amount to be advanced is determined by dividing the award by the number of payment periods the student will attend in the academic year. Only one payment is necessary if the total amount awarded to a student for an academic year under the Federal Perkins Loan Program is less than $501. [[Uneven costs]] If a student incurs uneven costs or resources during an academic year and needs additional funds during a payment period, the school may advance the additional amount WHETHER OR NOT THE SCHOOL USES STANDARD ACADEMIC TERMS. For example, a student will receive a $1,000 Federal Perkins Loan, and the student must spend $300 for books and supplies at the beginning of the school year. That $300 could be disbursed along with the first payment. To determine the first payment, subtract the extra amount (in this case, $300) from the total loan and divide the remainder by the number of payment periods. The regular amount for one payment period is then added to the extra amount to determine the initial payment. If a school has a two-semester system, the payments would be determined as follows: [[The chart on page 6-23 is currently unavailable for viewing. Please reference your paper document for additional information.]] Within a payment period, the school may advance funds in whatever installments it determines will best meet the student's needs.

Home  |  Privacy Statement  |  FAQs  |  IFAP Search Help Copyright © 2003, IFAP. All rights reserved.