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AwardYear: 1995-1996 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 3 SectionTitle: Repayment PageNumbers: 25-36 GRACE PERIODS [[Initial grace period]] A "grace period" is the period of time before the borrower must begin repaying the loan. An "initial grace period" is one that immediately follows a period of enrollment and immediately precedes the date repayment is required to begin for the first time. [[Grace period depends on when loan was made]] For borrowers who have been attending at least half time, initial grace periods are either 6 or 9 consecutive months after the borrower drops below at least half-time study at an eligible institution or at a comparable school outside the U.S. The length of the initial grace period varies because of legislative changes to the Federal Perkins Loan Program over the years. These changes also result in different repayment terms, depending on when a borrower took out a loan. If a borrower has several loans, each is subject to the repayment terms in effect at the time the particular loan was made. If a borrower requests a deferment to begin during the initial grace period, the borrower must waive his or her rights to the initial grace period in writing; the request for a deferment is not sufficient documentation for a school to waive the initial grace period without an acknowledgment from the borrower that he or she desires the initial grace period to be waived. (Deferments are discussed in Section Four, "Forbearance and Deferments.") Repayment of a Federal Perkins Loan begins 9 MONTHS after the borrower drops below at least half-time study. Repayment of an NDSL made before October 1, 1980, begins 9 MONTHS after the borrower drops below at least half-time study. Repayment of an NDSL made on or after October 1, 1980, begins 6 MONTHS after the borrower drops below at least half-time study. A borrower who returns to school on at least a half-time basis prior to completion of the initial grace period is entitled to a full initial grace period, calculated as 6 or 9 consecutive months. [[Post-deferment grace period]] A "post-deferment grace period" is the period of 6 consecutive months that immediately follows the end of certain periods of deferment and precedes the date on which the borrower must resume repayment on the loan. Federal Perkins Loans and NDSLs made on or after July 1, 1993 have a 6-month post-deferment grace period after each of the authorized deferments, INCLUDING the economic hardship deferment. Federal Perkins Loans and all NDSLs made on or after October 1, 1980, but before July 1, 1993, have a 6-month post-deferment grace period after each of the deferments that apply to those loans EXCEPT after the deferment for hardship. Neither the deferment nor the grace period is included in determining the 10- year repayment period. [[The chart "Grace Periods" on page 6-26 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Grace period is continuous]] For students attending at least half time, the initial grace period does not end until they cease to be enrolled at least half time for a CONTINUOUS period of 6 or 9 months, whichever is applicable. For example, a borrower takes out a loan in the fall quarter, drops out of school for the winter quarter, and resumes at least half-time study for the spring quarter. The borrower would still be entitled to a full initial grace period if he or she again leaves school or drops below half-time status. [[Grace periods for more than one loan]] If a borrower has received loans with different grace periods (and different deferments), the borrower must repay each loan according to the provisions in its promissory note; the borrower must pay the minimum monthly payments that apply to each loan that is not in a grace or deferment period. GRACE PERIOD FOR BORROWER ATTENDING LESS THAN HALF TIME [[Less than half-time attendance---with outstanding loan(s)]] A borrower who is attending LESS THAN HALF TIME and who has an outstanding Federal Perkins Loan or NDSL must begin repayment on an ADDITIONAL loan when the NEXT SCHEDULED INSTALLMENT of the outstanding loan is due; there is no formal grace period or in-school deferment on the new loan. [[Less than half time attendance---with no outstanding loan(s)]] For example, suppose the borrower has been making monthly repayments on Federal Perkins Loan #1. He takes out Federal Perkins Loan #2 in September 1994. His next scheduled payment on Loan #1 is October 15. He will begin repaying loan #2 at the same time. REMEMBER, THE REPAYMENT STATUS OF THE OUTSTANDING LOAN DETERMINES THE REPAYMENT STATUS OF THE SECOND LOAN. [[The graphic "Attending Less Than Half Time" on page 6-27 is currently unavailable for viewing. Please reference your paper document for additional information.]] A borrower who is attending less than half time and who has no outstanding Federal Perkins Loan or NDSL must begin repaying a new loan the EARLIER of-- - 9 months from the date the loan was made or - the end of a 9-month period that began on the date the borrower ceased to be enrolled as a regular student on at least a half-time basis, and that period includes the date the loan was made. For example, a student starts school full time in September 1995. She does not have an outstanding Federal Perkins Loan or NDSL. In January 1996, she drops to one-quarter time. In March, she receives a Federal Perkins Loan. Nine months from the date the loan was made will be December. Nine months from the time she dropped below half time is October, and this 9-month period includes the date the loan was made. As October is earlier than December, she must begin repayment in October. [[The graphic "Attending Less Than Half Time" on page 6-27 is currently unavailable for viewing. Please reference your paper document for additional information.]] PREPAYMENT [[No penalty for prepayment]] The borrower may prepay all or part of the loan at any time, without penalty. Amounts repaid DURING THE ACADEMIC YEAR THE LOAN WAS MADE and BEFORE THE INITIAL GRACE PERIOD HAS ENDED are not considered prepayments, but MUST BE USED TO REDUCE THE ORIGINAL LOAN AMOUNT. EXAMPLE: A borrower has received a $1,000 Federal Perkins Loan. His grandmother gives him $400 during the academic year in which the loan was made, and before the initial grace period has ended. The borrower applies the money toward his Federal Perkins Loan. The principal advanced to the borrower becomes $600. This is not considered a prepayment, because the original loan amount has been reduced. If the borrower repays MORE THAN THE AMOUNT DUE for any repayment period after the initial grace period has ended, the school must use the excess to prepay principal, unless the borrower designates it as an advance payment of the next regular installment. REPAYMENT PLAN [[Establish plan before student drops below half time]] Before the student ceases to be at least a half-time student, the school must establish a repayment plan. The following provisions apply to the repayment plan - if the last scheduled payment would be $15 or less, the school may combine it with the next-to-last payment; - if the installment payment for all loans made to a borrower by a school is not a multiple of $5, the school may round that payment to the next highest dollar amount that is a multiple of $5; and - the school must apply any repayment received in the following order: 1. collection costs; 2. late charges (or penalty charges); 3. accrued interest; and 4. principal. [[Loans at more than one school]] If a student receives loans at more than one school, the subsequent repayment of each loan is made (or default is attributed) to the school where the student received the loan. REPAYMENT SCHEDULE [[Repayment schedule provisions]] At the time a borrower leaves school, the school must conduct an exit interview (see Section Six of this Chapter: Due Diligence--- Loan Collection), during which a repayment schedule is provided to the borrower. The U.S. Department of Education recommends a repayment schedule that shows the principal and interest due on each installment and the amount left to be paid. This type of schedule is not a requirement; however, as a minimum, a repayment schedule should contain--- - the number of repayments of principal or the number of equal repayments; - the rate of interest; - the date the first repayment is due; and - the frequency of repayments. DEVELOPING A REPAYMENT SCHEDULE [[Calculating interest]] Interest on a loan must be computed at the rate of 5 percent per annum simple interest on the unpaid principal balance. Generally, interest is computed from the date a payment is received rather than from the due date. However, there are exceptions. For example, if a grace period expires in the middle of a month, interest may be computed to the beginning of the next month. Also, if a past due payment is received before the next regularly scheduled payment, the interest may be computed according to the established payment schedule--no adjustments are necessary. Past due payments should be applied in the same order as other payments. [[10-year repayment table]] To calculate the amount due in each payment over a period of 10 years, including principal and interest, a school may use the following table of "constant multipliers." The table is based on the assumption that the school will not exercise a minimum repayment option. Using this table will ensure that each of the borrower's payments is sufficient to cover the interest accruing between payments and that the loan will be repaid within the specified amount of time. [[The chart on page 6-30 is currently unavailable for viewing. Please reference your paper document for additional information.]] A school may require a borrower to pay a minimum monthly repayment amount if the promissory note includes a minimum monthly repayment provision specifying the amount of the minimum monthly repayment, if the monthly repayment of principal and interest for a 10-year repayment period is less that the minimum monthly repayment, or if the borrower has received loans with different interest rates at the same school and the total monthly repayment would otherwise be less that the minimum monthly repayment. If the promissory note includes the optional minimum monthly repayment provisions, the school may require the borrower to repay a monthly minimum amount of $40---or $30 in the case of certain loans. [[Proportional repayment under minimum $40 (or $30) option]] If the total monthly repayment of more than one loan would otherwise be LESS THAN $40 (or less than $30), and a school exercises the minimum $40 ($30) repayment option, the 10-year table of constant multipliers cannot be used, because the regulations require the $40 or $30 minimum repayment to be divided among the loans in the same proportion that the original loan principal of each loan bears to the total original principal of all loans. For example, a borrower with Federal Perkins Loans of $1,500 and $1,000 has a total debt of $2,500. Using the "Constant Multiplier" table above, the total monthly repayment on the two loans would be less than $30: $1,500 X .0106065 = $15.91 per month on loan #1 $1,000 X .0106065 = $10.61 per month on loan #2 ---------------------------- $26.52 total payment per month Since the monthly payment on the two loans is less than $40, the school may decide to exercise the minimum $40 repayment option. If it does, the monthly payment for each loan is calculated by dividing the original loan principal of the loan by the total original principal of all loans, as follows: $1,500 / $2,500 = .600000 X $40 = $24 per month on loan #1 $1,000 / $2,500 = .400000 X $40 = $16 per month on loan #2 ------ ---------------- $2,500 $40 total payment per month This same proportional loan payment method is used to calculate loan payments to more than one school. If the borrower has received loans with different grace periods and deferments, the school must treat each note separately, and the borrower must pay the minimum monthly payment that is applicable to each loan that is not in a grace or deferment period. ESTABLISHING REPAYMENT DATES Depending on the repayment schedule (monthly, bimonthly, or quarterly), the borrower's first payment is due one, two, or three months from the date the grace period expires. [[Standard dates for quarterly repayment]] For convenience, a school may establish standard repayment dates for borrowers who are on quarterly repayment schedules. The first repayment date may be the first day of the calendar quarter after the grace period has expired. Four standard repayment dates would be used: January 1, April 1, July 1, and October 1 (see the chart below). [[The chart "Example of Federal Perkins Loan Quarterly Billing" on page 6-31 is currently unavailable for viewing. Please reference your paper document for additional information.]] [["Rolling" quarterly repayment schedule]] Another type of repayment schedule is a "rolling" quarterly repayment schedule in which each borrower's first repayment is due exactly 3 months after the date his or her grace period expires. For example, if a borrower's first grace period expires on May 17, the first installment payment is due August 18. Another borrower's grace period expires May 18, so the first installment payment on that loan is due August 19. Repayment schedules must be adjusted (preferably on the first installment) so that the loan will be repaid within the normal 10-year period, or as prescribed in the terms of the promissory note. [[Effect of deferment on repayment dates]] For collection and bookkeeping purposes, it is preferable to have a fixed repayment date. Otherwise, if the borrower is entitled to a deferment, the school may have problems in computing the payments due. (See Section Four of this Chapter: Deferments.) Once the payment date has been established, the borrower will owe principal and interest for any portion of a scheduled installment period not covered by a deferment. However, if the borrower is in deferment on a due date, any amounts owed are carried over and paid on the first due date the borrower is out of deferment. INTEREST RATES FOR LOANS MADE BEFORE 10/1/81 [[Interest rate depends on date loan was made]] Interest rates charged on the unpaid balance of a Perkins Loan vary according to the date on which the loan was made. The interest rate is stated in the borrower's promissory note. The interest rate for loans made-- before 7/1/81.............was 3 percent per year; between 7/1/81 and 9/30/81........was 4 percent per year; on or after 10/1/81.........is 5 percent per year. Interest on loans made on or after October 1, 1981 is computed at the rate of five percent per annum simple interest on the unpaid principal balance. Interest should be computed from the date when the payment is received rather than from the due date; however, interest charges may be computed to the nearest first-of-the-month, or it may be computed in accordance with the borrower's established schedule of payments of principal and interest if the borrower is making payments on a regular basis according to that schedule. MINIMUM MONTHLY REPAYMENT AMOUNTS If the monthly repayment over a 10-year repayment period is less than $40 for a loan made on or after October 1, 1992 to a borrower who has no outstanding loan balance on a Federal Perkins Loan, NDSL, or Defense Loan, and if the promissory note includes an optional $40 minimum monthly repayment provision, the school may require the borrower to pay at least $40 a month (or the equivalent in bimonthly or quarterly payments). It is important to note that if the promissory notes include the optional $30 minimum monthly repayment provision for loans made BEFORE October 1, 1992, the school must continue to use the $30 minimum for those borrowers. Students may need to make a higher payment than $40 (or $30), of course, to repay their debt by the end of 10 years. The borrower may have received Federal Perkins Loan or NDSLs from more than one school. If only ONE school exercises the $40 (or $30) option when the total monthly repayments are less than $40 (or $30), that school receives the difference between $40 (or $30) and the repayment owed to the second school. EXAMPLE: Suppose School A, which does not exercise the minimum repayment option, would receive $25 a month (the amount due under its established 10-year repayment plan). School B, which exercises the $40 option, would receive $15, the difference between $40 and the amount of principal and interest paid to School A. If a borrower has obtained Federal Perkins Loan or NDSLs from more than one school and EACH exercises the minimum repayment option, the $40 or $30 minimum repayment is divided among the schools in proportion to the total amount of principal each has advanced. If the total monthly repayment is LESS THAN $40 (or $30), a school may exercise the minimum repayment options applicable to the respective loans. However, the maximum monthly repayment may not exceed $40 (or $30). If the borrower owes funds to more than one school, he or she should contact any school that is exercising a minimum repayment option and provide the following information: - the names of all other schools to which the borrower owes funds under the Federal Perkins Loan Program; - the approximate amount of the indebtedness to each school; and - any information that would help identify the loans—for example, the loan number and the dates of loan advances. The school the borrower contacts should then contact the other schools and negotiate the amount each should receive from the borrower. [[Different interest rates from the same school]] If a borrower has loans with different interest rates from the same school, and the borrower's total monthly repayment is AT LEAST $40 (or $30) for all loans, the school may not exercise the minimum monthly payment on any loan. If the total monthly repayment would be LESS THAN $40 (or $30), the school may exercise the $40 (or $30) option, providing it has been included in the promissory note, and the school divides the repayment between accounts in proportion to the amount of principal advanced under each loan. [[Different grace periods and deferments]] As stated earlier, if a borrower has loans with different grace periods and deferments, the school must treat each note separately, and the borrower must pay the applicable minimum monthly payment for any loan that is not in a grace or deferment period. [[Reduce payment amount due to hardship]] A school may reduce a borrower's scheduled payments for up to one year at a time if the borrower is paying at least the $40 (or $30) minimum monthly payment amount and the school determines that the borrower is unable to make the scheduled payments due to hardship. LENGTH OF REPAYMENT PERIOD [[Usual maximum repayment period is 10 years]] The term "repayment period" generally refers to the span of time the borrower has to repay his or her loan---usually a maximum of 10 years from the time repayment begins. (For the exception, see the discussions of "hardship" and "low-income individual" below.) Borrowers must repay their loans, plus interest, in quarterly, bimonthly, or monthly installments over a 10-year period. The length of a repayment period may be less than 10 years because of minimum monthly repayment requirements. If a borrower wants to repay the loan in graduated installments, he or she must request permission from the school; if the school agrees to this type of repayment, a graduated repayment schedule is prepared and submitted to ED for approval. If the ED approves the school's request, the borrower may use the graduated method of repayment. A school may EXTEND the repayment period if the borrower is encountering hardship due to prolonged illness or unemployment or because the borrower is a "low-income individual" (defined on the next page). Interest continues to accrue during any extension of a repayment period. EXTENSION OF REPAYMENT FOR A LOW-INCOME INDIVIDUAL [[Extension in the event of hardship]] For NDSLs made on or after October 1, 1980 and for Perkins Loans, a school may extend the borrower's repayment period up to 10 additional years if, during the course of the repayment period, the school determines that the borrower qualifies as a "low-income individual." The school must review the borrower's status annually to determine whether he or she still qualifies as a low-income individual. If not, the borrower's repayment schedule must be amended so that the term of the amended schedule does not exceed the number of months remaining on the original repayment schedule, not counting the extension period. The school may also ADJUST the repayment schedule to reflect the family income of a borrower who is a low-income individual. There are two ways the school can make this adjustment: 1. The school could require the borrower to pay a reduced amount for a limited time and then increase the payment amount to allow the borrower to catch up on payments. For example, the school could reduce the payment amount to $10 per month for six months and then increase it to $50 per month until the borrower catches up. In this way, the payment period would not be extended. 2. The school could allow the borrower to pay $10 per month for a year and then resume normal payments. This type of adjustment would extend the repayment period. The definition of the term "low-income individual" is based on the maximum income levels in the Income Protection Allowance (IPA) chart published annually in the Federal Register. The IPA chart for the 1995-96 award year was published May 17, 1994 (see the maximum income levels for the 1995-96 award year in the chart below). 1. For an unmarried borrower without dependents, a "low- income individual" is one whose total income for the PRECEDING CALENDAR YEAR did not exceed 45 percent of the IPA for the CURRENT AWARD YEAR for a family of four with one in college. For the 1995-96 award year, an unmarried borrower without dependents is a low-income individual if his or her 1994 income was $7,718 or less. 2. For a borrower with a family that includes the borrower and any spouse or legal dependents, a "low-income individual" is one whose total family income for the preceding calendar year did not exceed 125 percent of the IPA for the current award year for a family equal in size to that of the borrower's family with one family member in college. [[The chart "Low-Income Individual" on page 6-35 is currently unavailable for viewing. Please reference your paper document for additional information.]] DISPOSITION OF PROMISSORY NOTE AND REPAYMENT SCHEDULE The school must keep the original signed promissory note and repayment schedule in a locked, fireproof container until the loan is repaid or until the originals are needed in order to enforce collection of the loan. Only authorized personnel may have access to the notes. [[Attach repayment schedule to pre-1987 notes]] Current promissory notes do not require that the repayment schedule be ATTACHED to the note. However, promissory notes prior to December 1, 1987 did include a requirement to attach the repayment schedule to the promissory note. Therefore, a school should be aware that if a promissory note has this requirement in the "Repayment" section of the note, the school must be careful to attach the repayment schedule to that note. If the original promissory note is released to enforce repayment, the school must keep a certified true copy. A certified true copy is a photocopy (front and back) of the original promissory note that bears the following certification statement signed by the appropriate school official: "CERTIFIED TRUE COPY: I declare under penalty of perjury that the foregoing is a true and correct copy of the original Promissory Note. Signature:_________________________________ Title:_____________________________________ Date:_____________________________________" At the exit interview, the school must provide a copy of the signed promissory note and the signed repayment schedule to the borrower. If the school is unable to obtain a SIGNED repayment schedule, it must provide the schedule the borrower is to follow in repaying the loan. If an error is discovered in a promissory note, the school should obtain legal advice about what action it should take. The appropriate school official and the student should sign or initial all approved changes in the note. [[Borrower receives original note after loan is paid in full]] When a loan has been repaid, the school should mark the note "PAID IN FULL," have it certified by an official of the school, with the date paid, and give or mail 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 paid in full. Because a borrower must reaffirm a Federal Perkins Loan that has been written off before he or she is eligible to apply for future federal student aid, ED recommends that the school maintain a certified copy of the signed promissory note as well as a record of the full amount owed in its records beyond the five-year record retention requirement.

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