USA Funds University Federal Direct Loans: The Basics Aug. 18, 2015
Special Note These materials are for the benefit of financial aid professionals and other campus administrators. They are intended to provide current facts and information and are not intended to be legal advice. These materials contain information related to Federal Title IV student aid programs and have neither been reviewed nor approved by the U.S. Department of Education. You are encouraged to seek your own competent legal counsel in connection with the topics covered in these materials. USA Funds disclaims all responsibility for any claim arising from reliance on the information provided. Copyright 2015 United Student Aid Funds, Inc. All Rights Reserved. Questions regarding the content of this publication should be addressed to USA Funds University, P.O. Box 6028 Indianapolis, IN 46206-6028 or by calling (317) 806-0208. www.usafunds.org
Federal Direct Loans: The Basics To help cover the costs of higher education, more students and families depend upon Title IV education loans than any other type of financial assistance. As reported in the College Board's Trends in Student Aid 2014, during the 2013-2014 award year, federal loans represented 58 percent of all federal financial assistance for postsecondary education. Significant changes have occurred since 1965 when the Guaranteed Student Loan program was first introduced, under which loan capital was provided by private lenders, facilitated by a federal guarantee. Lenders were allowed to begin offering PLUS and Consolidation loans in 1980. The GSL program was renamed the Stafford Loan program in honor of Senator Robert Stafford of Vermont in 1988. Four years later, all of these loan programs were combined together under the Federal Family Education Loan program. This helped distinguish it from the William D. Ford Federal Direct Loan Program, which was implemented on July 1, 1994, under which loan funds are paid directly from the U.S. Treasury. The Health Care and Education Reconciliation Act of 2010 eliminated the ability for FFELP participants to originate, guarantee or disburse loans, requiring all schools to use DL beginning July 1, 2010. Guarantors and lenders continue to service existing Federal Family Education Loan Program loans to help ensure successful repayment. FFEL and Direct Loan Players Player Federal Government u u Responsibility Congress periodically reviews the Higher Education Act of 1965, as amended, and determines if changes are necessary and authorizes funding for the Title IV programs. U.S. Department of Education administers and regulates all Title IV aid programs and monitors program compliance. Schools Guarantors u u u u u u u u u u Determine student and parent eligibility, originate loans, and provide loan counseling. Disburse loan funds, process refunds and conduct other loan-related transactions. Participate in financial education and default prevention efforts. Monitor and report students enrollment statuses. Provide required consumer information. Assist borrowers to resolve payment problems and avoid default on FFEL loans. Provide a guarantee of payment to lenders if borrowers fail to repay FFEL loans. Maintain a reserve of funds to pay lender claims. Recover, on behalf of taxpayers, amounts owed by FFEL borrowers in default on their loans. Monitor school and FFEL lender compliance with relevant laws, regulations and policies. Lenders u Provide servicing to existing FFEL borrowers. Servicers u u Manage FFEL and Direct loans on behalf of ED, guarantors, lenders and secondary markets. Serve as point-of-contact for borrowers, schools, loan holders and guarantors. Borrowers u u Know their rights and responsibilities under the terms and conditions of their loans and repay the loans according to the repayment plan they selected. Keep their loan holders informed of their contact information and any information pertinent to their ability to repay their loans. 1
Direct Subsidized and Unsubsidized Loans 34 CFR 682. 34 CFR 685. Students enrolled at least half time in a postsecondary degree or certificate program may qualify to borrow federal education loans to help pay for their educationally related expenses. Unsubsidized loans are available to both undergraduate and graduate students; subsidized loans are available only to undergraduate students. Direct Subsidized Loans HEA Sec. 428. HEA Sec. 451. 34 CFR 682.300. 2015-2016 Federal Student Aid Handbook, Vol. 3. u Direct Subsidized loans are need-based loans for undergraduate students. u The borrower is not responsible for the interest on these loans while in school at least half time and during: The six-month grace period before repayment begins. Authorized periods of deferment. Certain periods of repayment under the income-based repayment and Pay As You Earn repayment plans. Note: The Consolidated Appropriations Act of 2012 temporarily eliminated the interest subsidy during the grace period on Direct Subsidized loans first disbursed between July 1, 2012, and June 30, 2014. Any unpaid interest that accrues is capitalized. u The following calculation for the applicable loan period determines eligibility: u If an undergraduate student demonstrates $200 or less of financial need for a Direct Subsidized loan, financial aid administrators may decline to originate the subsidized portion if the unused subsidized eligibility can be added to the student s unsubsidized loan eligibility. The student s file should be documented when this option has been exercised. Cost of Attendance Expected Family Contribution Estimated Financial Assistance = Direct Subsidized Loan Eligibility Interest Subsidy Limit HEA Sec. 455(q). 34 CFR 668.32(a). 34 CFR 685.200. 34 CFR 685.203. Dear Colleague Letter GEN-13-13. First-time borrowers on or after July 1, 2013, may receive Direct Subsidized loans for a period of time not to exceed 150 percent of the published length of the student s current educational program. Students subject to this limitation cannot receive Direct Subsidized loans beyond this timeframe, unless the student enters a longer educational program. Exceptions are made for students who: u Borrow the full annual loan limit in a period shorter than a full academic year. u Enroll less than full time. u Enroll in certain coursework or special admission degree programs: Teacher certification coursework. Undergraduate and graduate preparatory coursework. Selective admission associate degree programs. Bachelor's degree completion programs. Once borrowers reach the 150 percent limitation and have not completed their program of study, eligibility for the interest subsidy ends for all outstanding Subsidized loans. At that time, interest on the previously borrowed loans may begin to accrue in the same manner as interest on Direct Unsubsidized loans if the borrower continues enrollment beyond the 150 percent threshold. The Department determines which students are affected based on the school s reporting of key data elements, and notifies schools using comment codes and C-flags. Eligibility information also appears in the borrower s NSLDS record. Students may not appeal the Department s 150 percent limitation but may identify errors in previously reported loan periods and/or academic years. The school - or a previous school - may be required to enter necessary corrections to ensure the student s continued eligibility. Trainer s Tidbit The National Student Loan Data System is a centralized database that stores information on all U.S. Department of Education loans and grants. NSLDS also contains servicer information for each of a borrower's federal student loans. Using their Federal Student Aid ID, borrowers can access this information online at: http://www.nslds.ed.gov/. 2
Direct Unsubsidized Loans HEA Sec. 428H. HEA Sec. 451. 2015-2016 Federal Student Aid Handbook, Vol. 3. u Direct Unsubsidized loans are non-need-based. u Borrowers are responsible for the interest on these loans from the date of disbursement until they are paid in full, which includes: The six-month grace period before repayment begins. Authorized periods of deferment. Certain periods of repayment under the income-based repayment and Pay As You Earn repayment plans. u Students have the option to pay the interest during school or postpone payment. If payment is postponed, the interest is added to the principal balance of the loan. This addition of interest to the principal balance is known as capitalization. u The following calculation for the applicable loan period determines eligibility: Cost of Attendance Estimated Financial Assistance Direct Subsidized Loan Eligibility, if any = Direct Unsubsidized Loan Eligibility u Neither law nor regulation specifies a minimum Direct Unsubsidized loan amount. Borrower Eligibility 34 CFR 668.32. 34 CFR 682.201. 34 CFR 685.200. A student-borrower of Direct Loans must meet certain eligibility requirements before a loan may be originated: u Be a U.S. citizen or eligible noncitizen. Note: Students who are residents of Federated States of Micronesia, Republic of Marshall Islands or the Republic of Palau are ineligible for federal education loans. u Have a high school diploma, or its equivalent, or have been determined to have the ability to benefit under one of several exceptions. u Provide a valid Social Security number. u Be enrolled at least half time in an eligible program or course of study leading to a degree or certificate at a participating institution of higher education. u Make satisfactory academic progress. u Not be in default on a federal student loan. u Not owe an overpayment on a federal grant or loan. u Have registered with the Selective Service (if required). u Not be incarcerated. u Not pled guilty or no contest to, or been convicted of, a crime of fraud in obtaining Title IV financial aid (unless the borrower repays in full the funds obtained fraudulently). u Not been convicted of certain drug offenses while enrolled and receiving Title IV assistance. NOTES 3
Annual Direct Loan Limits 34 CFR 685.203. The regulations place limits on the amount of Direct Loans students may borrow for an academic year. Students who borrow the maximum loan amount cannot obtain additional loan funds until they either begin a new academic year (as defined by the school) or progress to a grade level with higher annual loan limits in the same academic year. Loan limits are based on dependency status, current grade level and the length of the program of study (or remaining period of study). All undergraduate loan limits are subject to proration if students are completing a program that is less than one academic year in length, or are completing a program that is one academic year or longer during a period that is less than one academic year in length. Students who borrow in excess of annual or aggregate limits are ineligible for additional Title IV aid of any kind until the situation is resolved. Direct Loan Limits Annual Limits Dependent Undergraduates Subsidized Total (Subsidized and Unsubsidized) First Year $3,500 $5,500 Second Year $4,500 $6,500 Third and Subsequent Years $5,500 $7,500 Teacher Certification* $5,500 $5,500 Independent Undergraduates** First Year $3,500 $9,500 Second Year $4,500 $10,500 Third and Subsequent Years $5,500 $12,500 Teacher Certification* $5,500 $12,500 Graduate Students Any level $0 $20,500 * Limits apply to students with a prior baccalaureate degree enrolled in coursework leading to state-required teacher certification. Dependent undergraduates enrolled in teacher certification coursework do not qualify for any additional unsubsidized loan eligibility, unless a parent is unable to borrow under the Direct PLUS loan program. ** Limits apply to both independent undergraduate students and dependent undergraduate students whose parents are unable to borrow under the Direct PLUS loan program. NOTES 4
Annual Loan Limits for Preparatory Coursework 34 CFR 685.203(a)(6). Some schools allow students to take coursework that prepares them for enrollment in a degree or certificate program. Students pursuing this type of coursework may obtain federal student or parent loans for up to 12 consecutive months, beginning on the first day of the first loan period. Different annual loan limits apply to student loans depending on whether the coursework leads to enrollment in an undergraduate or graduate program. Dependent students taking preparatory coursework cannot qualify for additional unsubsidized loan eligibility, unless a parent is unable to borrow under the Direct PLUS loan program. These limits are not subject to proration, however, since these students are not yet enrolled in an eligible program. Direct Loan Limits for Preparatory Coursework Annual Limits Dependent Undergraduates Subsidized Total (Subsidized and Unsubsidized) For undergraduate programs $2,625 $2,625 For graduate programs $5,500 $5,500 Independent Undergraduates* For undergraduate programs $2,625 $8,625 For graduate programs $5,500 $12,500 * Limits apply to both independent undergraduate students and dependent undergraduate students whose parents are unable to borrow under the Direct PLUS loan program. Annual Loan Limits for Health Professions Students 34 CFR 668.14(b). Students enrolled at least half time in certain health professions graduate level programs qualify for increased annual loan limits. The program must approved by specific accrediting agencies. Direct Loan Limits for Health Professions Students Annual Limits Health Professions Programs Unsubsidized Additional Unsubsidized* Total (Unsubsidized) u Graduate in Public Health. u Doctor of Pharmacy or Chiropractic. u Doctoral Degree in Clinical Psychology. u Masters or Doctoral Degree in Health Administration. u Doctor of Dentistry, Veterinary Medicine, Optometry, Allopathic Medicine, Osteopathic Medicine, Podiatric Medicine, Naturopathic Medicine, or Doctor of Naturopathy. $20,500 $12,500 $33,000 $20,500 $20,000 $40,500 * When a program s academic year is greater than nine months in length, additional unsubsidized loan limits are prorated by dividing the nine-month amount by nine and multiplying the result by the number of months in the academic year. 5
Example: Student Loan Eligibility Calculations Kevin and his older sister, Karen, enroll at the same school during the academic year. Kevin is a fourth-year, dependent undergraduate student. Karen went to work full time after graduating from high school and has decided to quit her job and begin working on an associate s degree. She will be a first-year independent undergraduate student. As full-time degree-seeking students, they have the same Cost of Attendance; however, their Expected Family Contributions are different. The school awards each of them the gift aid for which they qualify before calculating eligibility for federal loans. Subsidized and Unsubsidized Loan Eligibility Kevin: Fourth-Year, Dependent Undergraduate Subsidized COA $15,000 EFC 5,000 Need $10,000 Merit Aid $2,000 State Aid $4,000 Scholarship $1,000 Unmet Need $3,000 Unsubsidized COA $15,000 Merit Aid $2,000 State Aid $4,000 Scholarship $1,000 Subsidized Loan $3,000 Unmet COA $5,000 Subsidized Loan $3,000 Unsubsidized Loan $4,500 Subsidized and Unsubsidized Loan Eligibility Karen: First-Year, Independent Undergraduate Subsidized COA $15,000 EFC 7,000 Need $8,000 Scholarship $2,000 Unmet Need $6,000 Unsubsidized COA $15,000 Scholarship $2,000 Subsidized Loan $3,500 Unmet COA $9,500 Subsidized Loan $3,500 Unsubsidized Loan $6,000 NOTES 6
Aggregate Direct Loan Limits 34 CFR 682.204(b) and (e). 34 CFR 685.203(d)-(e). Aggregate loan limits restrict the total amount students can have outstanding during their entire undergraduate and graduate careers. A student s outstanding FFELP and Direct Loan amounts including any subsidized and unsubsidized loan principal that is part of a Consolidation loan must be compared to the applicable aggregate loan limit before originating any additional amount of subsidized or unsubsidized loan funds. Borrowers may qualify for new aggregate loan limits as a result of a change in the student's status, such as an undergraduate student enrolling in a graduate degree program. Once the aggregate limit is reached, the student must repay some loan funds or have the funds discharged, canceled or forgiven before being eligible to borrow more. Any student whose cumulative total of FFELP and Direct Subsidized or Unsubsidized loans exceeds the aggregate limit immediately loses eligibility for federal financial aid from any Title IV program. Direct Loan Limits Aggregate Limits Subsidized Total (Subsidized and Unsubsidized) Dependent Undergraduates* $23,000 $31,000 Independent Undergraduates** $23,000 $57,500 Graduate/Professional Students*** $65,500 $138,500 * Limits also apply to dependent students with a baccalaureate degree enrolled in coursework leading to a state-required certification. ** Limits apply to both independent undergraduate students and dependent undergraduate students whose parents are unable to borrow under the Direct PLUS loan program. Limits also apply to independent students with a baccalaureate degree enrolled in coursework leading to a state-required certification. *** Graduate and professional students enrolled in certain health professions programs may borrow up to $224,000, no more than $65,500 of which may be subsidized. Trainer s Tidbit 34 CFR 682.204. 34 CFR 685.203. Some items do not count toward the aggregate loan limit, such as: u Capitalized interest. u Capitalized collection costs. u PLUS loans borrowed by the student or student s parents. u A TEACH grant that has been converted to a Direct Unsubsidized Loan. u Amounts that are repaid, refunded, returned, prepaid, canceled, discharged or forgiven. 7
Trainer s Tidbit 2015-2016 FSA Handbook, Vol. 3, Ch. 5, p. 3-126. 2015-2016 ISIR Guide, p. 46. NSLDS Newsletter 11. For borrowers with Consolidation loans, ED has stated that unallocated funds are not included when determining remaining eligibility and schools are not required to identify the source of unallocated amounts reported in NSLDS. Instead, schools should rely on Aggregate Outstanding Principal Balance amounts for subsidized and unsubsidized loans. These amounts also are combined to create the Calculated Combined Agg. OPB for comparison to aggregate loan limits. Direct PLUS Loans HEA Sec. 428B. HEA Sec. 451. 34 CFR 685.201(b). When college costs exceed financial aid and family resources, students and families can turn to PLUS loans to fill the funding gap. Parents of dependent undergraduate students and graduate/professional students may borrow Direct PLUS loans. Eligibility for Parents of Dependent Students 34 CFR 685.200(c). u The Free Application for Federal Student Aid must be filed prior to awarding parent PLUS loan funds. u The parent-borrower must be the biological or adoptive parent of the dependent student. u The parent-borrower may be the stepparent of the dependent student, if the stepparent s income and assets would have been taken into account when calculating the EFC. u A natural or adoptive parent of a dependent student who was not required to provide income and asset information on the student's application for financial aid can borrow a PLUS loan to help meet that student's educational expenses. u More than one eligible parent-borrower may obtain Direct PLUS loans for the same dependent student for the same period of enrollment, as long as the student's total financial assistance does not exceed the student's Cost of Attendance. u The qualifying dependent student must be enrolled at least half time, making satisfactory progress towards a degree or certificate at an eligible institution and meet all other eligibility criteria. Eligibility for Graduate/Professional Students 34 CFR 685.200(b). u Graduate/professional students must file a FAFSA. u The school must determine the student s maximum subsidized and unsubsidized loan eligibility prior to the student receiving a Direct PLUS loan; however, the student is not required to borrow Direct Subsidized and Unsubsidized loan funds. u Before originating a PLUS loan, the school must determine whether the student has requested the maximum subsidized and unsubsidized loan amount. If not, the school is required to notify the student of the terms of both loan types and give the student an opportunity to request the maximum subsidized and unsubsidized loan amount. This notification must include a comparison of all of the following: Maximum interest rates. Periods when interest accrues. When repayment begins. 8
Borrower Eligibility 34 CFR 685.200(b)-(c). 34 CFR 668. A parent or student borrower must meet the following criteria to qualify for a PLUS loan: u Be a U.S. citizen or eligible noncitizen. u Have a valid Social Security number. u Not be in default on a federal student loan. u Not owe an overpayment on a federal grant or loan. u Not pled guilty or no contest to, or been convicted of, a crime of fraud in obtaining Title IV financial aid. u Meet standards for Direct PLUS loan approval by either: Not having adverse credit. Applying with an endorser without adverse credit. Having no credit history is not considered the same as having adverse credit and does not prevent an applicant from qualifying for a Direct PLUS loan. The school may make a determination that the parent of a dependent student cannot borrow. For example, a parent who is a foreign national and not an eligible non-citizen is not an eligible Direct PLUS loan borrower. Rather than ask the parent to apply and be denied, the school can document the reason that the parent cannot borrow Direct PLUS loan funds. Trainer s Tidbit Dear Colleague Letter GEN-15-06. Applicants denied access to Direct PLUS loans due to adverse credit history must complete the U.S. Department of Education's PLUS loan credit counseling before receiving PLUS loan funds. Additional Loan Eligibility for Dependent Students Whose Parent Cannot Obtain a Direct PLUS Loan In the event that a parent-borrower is denied a PLUS Loan or is unable to obtain a PLUS loan because of exceptional circumstances, the student may be eligible to borrow additional Direct Unsubsidized loan funds up to the amount for which they would be eligible if they were independent. The student s aggregate loan limit is increased by the additional unsubsidized amount the student received due to the parent s inability to obtain parent PLUS loan funds. For a dependent student to qualify for additional unsubsidized loan eligibility, only one parent need apply and be denied. Trainer s Tidbit ED has stated that...if one of a dependent student's parents is denied a PLUS loan, it is not necessary for the other parent to also apply and be determined ineligible for a PLUS loan. However, if a parent subsequently applies for the PLUS loan and is determined to be eligible, the dependent student immediately becomes ineligible for any further unsubsidized Stafford loan disbursements. 9
Example Lesley is a dependent undergraduate student enrolled in an associate degree program. Her COA is $12,000. During her second year, she changed her major and now she must enroll full time for a third full year of coursework. For her third year in this two-year program, the maximum subsidized and unsubsidized loan amount for which she could qualify is $6,500, no more than $4,500 of which may be subsidized. To help with the costs of an additional year of coursework, Lesley s father applies for a Direct PLUS loan. Due to adverse credit history, however, her father does not qualify to borrow a PLUS loan. Even though her mother does not apply, Lesley now qualifies for an additional $4,000 of unsubsidized loan. As a result, the maximum subsidized and unsubsidized loan amount for which she could be eligible increases to $10,500, no more than $4,500 of which may be subsidized. Trainer s Tidbit 34 CFR 685.200(c)(1)(vii). StudentLoans.gov. https://studentaid.ed.gov/sa/sites/default/files/plus-adverse-credit.pdf. Direct Loan regulations state that PLUS loan applicants are considered to have adverse credit history if they either: u Have one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or written off during the two years preceding the date of the credit report. u Have been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt during the five years preceding the date of the credit report. Additional information and samples of acceptable documentation for appealing adverse credit decisions are available at: https://studentloans.gov/mydirectloan/whatyouneed.action?page=credit. Direct PLUS Loan Amounts HEA Sec. 428B. 34 CFR 685.102(b)(viii)(4). 34 CFR 685.200(e). PLUS loans are non-need-based and do not qualify for a federal interest subsidy. Borrowers are responsible for all interest that accrues from the date the applicable loan is disbursed until the date it is paid in full. The following calculation for the applicable loan period determines eligibility: Direct PLUS Loan Limits 34 CFR 685.203(f)-(g). Cost of Attendance Estimated Financial Assistance Direct Subsidized Loan Eligibility, if any Direct Unsubsidized Loan Eligibility = Direct PLUS Loan Eligibility Parents and graduate/professional students can borrow annually up to the student s total COA, less any other financial aid. There is no aggregate loan limit for Direct PLUS loans. 10
The Cost of Borrowing Debt comes at a cost. Federal education loans have certain terms and conditions that usually result in repayment of a larger amount than the loan principal borrowed. Schools, loan servicers, lenders and guarantors help borrowers understand these terms and conditions so students and parents are able to make informed decisions about which loans to borrow and develop strategies for successful repayment. Federal Education Loan Fees 34 CFR 685.202(c). DL Bulletin DLB-00-48. Dear Colleague Letter GEN-15-07. Part of the cost of borrowing Direct Subsidized and Unsubsidized and PLUS loans is an origination fee deducted prior to each disbursement. As a result, the borrower receives disbursements for slightly less than the amount borrowed. Over time, the full amount borrowed disbursed amounts plus fees will be repaid. Federal Education Loan Origination Fees First Disbursement Made on or After... Direct Subsidized and Unsubsidized Loans Direct PLUS Loans Oct. 1, 2015 1.068% 4.272% Oct. 1, 2014 1.073% 4.292% Trainer s Tidbit For students or parents borrowing through the federal Direct Loan Program, schools must include in the COA any fees deducted from loan proceeds. Fees deducted from private education loans borrowed by the student also may be included in the COA. NOTES 11
Interest Charges When money is borrowed, the lender expects the borrower to repay an additional amount in exchange for the use of the funds. Known as interest, this additional amount is expressed as an annual percentage rate. Interest charges are calculated as a percentage of the unpaid principal amount of the loan. Higher interest rates result in higher costs. The frequency with which interest is calculated daily, monthly, quarterly or annually also affects the overall cost of borrowing. The interest on federal education loans is calculated daily. Subsidized and Unsubsidized Loan Interest Rates 34 CFR 682.202. 34 CFR 685.202. Electronic Announcement, May 27, 2015. Electronic Announcement, Aug. 9, 2013. The way in which interest is charged on federal education loans has changed over time. Subsidized and unsubsidized loans currently accrue interest at a fixed rate, meaning that the rate of interest accrual stays the same over the life of the loan. Some loans made in prior years have variable interest rates that change annually. A chart of interest rates on loans issued between 1998 and 2014 appears in the Appendix. Fixed-Rate Loans The fixed interest rates that apply depend on the rules in effect as of the date of the first disbursement of each loan, as specified in the applicable Master Promissory Note. The fixed rate of interest that applies to each new loan remains in effect for the life of that loan. Effective for loans first disbursed on or after July 1, 2013, Congress redefined the way in which annual interest rates will be determined. Fixed rates for new loans will be based on the high yield of the 10-Year Treasury Note auctioned prior to July 1 of each year, plus an add-on defined in the law. For subsidized and unsubsidized loans, the add-on is 2.05 percent for undergraduate borrowers and 3.60 percent for graduate/professional student borrowers. The resulting rates for the 2015-2016 award year appear in the table below. First Disbursement Interest on Fixed-Rate Subsidized and Unsubsidized Loans Undergraduate Borrowers Graduate Borrowers Subsidized Unsubsidized Subsidized Unsubsidized 7/1/2015-6/30/2016 4.29% 4.29% N/A 5.84% 7/1/2014-6/30/2015 4.66% 4.66% N/A 6.21% 7/1/2013-6/30/2014 3.86% 3.86% N/A 5.41% 7/1/2012-6/30/2013 3.4% 6.8% N/A 6.8% 7/1/2011-6/30/2012 3.4% 6.8% 6.8% 6.8% 7/1/2010-6/30/2011 4.5% 6.8% 6.8% 6.8% 7/1/2009-6/30/2010 5.6% 6.8% 6.8% 6.8% 7/1/2008-6/30/2009 6.0% 6.8% 6.8% 6.8% 7/1/2006-6/30/2008 6.8% 6.8% 6.8% 6.8% 12
Variable-Rate Loans Variable federal education loan interest rates depend on the rules in effect as of the date of the first disbursement of each loan, as specified in the applicable promissory note. The variable rate is based on the sale of the 91-day Treasury Bill at the end of May. For some loans, higher rates apply during repayment than during enrollment, grace or deferment. By July 1 of each year, ED announces the new rates that borrowers of variable rate loans will pay for the next 12 months. Interest rates may increase or decrease each year, but the variable rate will never exceed 8.25 percent, under current rules. Interest on Variable-Rate Stafford Loans July 1, 2015 to June 30, 2016 First Disbursement In-School, Grace and Deferment Periods Subsidized Stafford Unsubsidized Stafford Subsidized Stafford Repayment Unsubsidized Stafford 7/1/1998-6/30/2006 1.72% 1.72% 2.32% 2.32% PLUS Loan Interest Rate 34 CFR 682.202(a)(2). 34 CFR 685.202(a)-(b). Electronic Announcement, May 15, 2015. PLUS loans disbursed on or after July 1, 2006, have a fixed interest rate during in-school, deferment and repayment periods. Interest rates for PLUS loans disbursed prior to July 1, 2006, will continue to be variable and will be adjusted each July 1. Effective for loans first disbursed on or after July 1, 2013, Congress redefined the way in which annual interest rates will be determined. Fixed rates for new loans will be based on the high yield of the 10-Year Treasury Note auctioned prior to July 1 of each year, plus an add-on defined in the law. For PLUS loans, the add-on is 4.60 percent. The resulting rates for the 2015-2016 award year appear in the table below. Interest on PLUS Loans First Disbursed July 1, 2015 to June 30, 2016 Fixed or Variable Rate 7/1/2015-6/30/2015 6.84% Fixed 7/1/2014-6/30/2015 7.21% Fixed 7/1/2013-6/30/2014 6.41% Fixed 7/1/2010-6/30/2013 7.9% (DL) Fixed 7/1/2006-6/30/2010 8.5% (FFELP) 7.9% (DL) Fixed 7/1/1998-6/30/2006 3.12% Variable, capped at 9.0% NOTES 13
Interest Accrual As described in the Master Promissory Note signed by each recipient of federal education loan funds, interest accrues unless: u The borrower qualifies for an interest subsidy. u The borrower qualifies for relief from interest accrual during a period when that borrower is serving active duty in the U.S. in a location that qualifies the borrower for special pay. The borrower of an unsubsidized or PLUS loan may choose to make payments of interest during any period in which interest would normally accrue. This includes when the student-borrower or student-beneficiary is enrolled at least half time and during periods of grace, deferment or forbearance. Federal Education Loan Program Interest Accrual In-School Grace Period Repayment Deferment Forbearance Subsidized No No Yes No Yes Unsubsidized Yes* Yes* Yes Yes** Yes PLUS Yes* Yes* Yes Yes** Yes * The borrower may choose to pay accruing interest. ** The lender must advise the student-borrower of the option to pay interest charges that are accruing. NOTES 14
Interest Capitalization Any unpaid interest that accrues on federal education loans during periods when payments of loan principal are not due is added to the loan s principal balance, a process known as capitalization. Subsequent interest charges are based on the new loan balance, which increases the cost of the loan. In most cases, unpaid interest on federal educations loans is capitalized when: u The loan initially enters repayment. u A deferment or forbearance period ends. u A borrower on an income-based repayment plan no longer demonstrates a partial financial hardship or no longer wishes to makes payments under IBR. u The loan is in default. Interest Benefits for Service Members While serving in the military, FFEL and Direct borrowers may qualify for an interest rate cap of 6 percent on Direct Subsidized and Unsubsidized and PLUS loans obtained before entering military service. Additionally, the Higher Education Opportunity Act of 2008 extended provisions for Direct Loan borrowers serving on active duty or performing qualifying National Guard duty during a war or other military operation or other emergency, and serving in an area of hostilities qualifying for special pay to qualify for a waiver of interest charges for up to 60 months on Direct Loans first disbursed on or after Oct. 1, 2008. The borrower must contact the loan servicer to request these benefits. Loan Repayment 34 CFR 682.209. 34 CFR 685.207. For borrowers of subsidized and unsubsidized loans, repayment of the loan principal and any accrued interest begins six months after the student ceases to be enrolled at least half time, or at the end of the qualifying period of enrollment if the student already has used the six-month grace period. Unless repayment is delayed or deferred, the first loan payment is due within 60 days. For parent and student PLUS loan borrowers, repayment of loan principal and any accrued interest begins on the date the loan is finally and fully disbursed. PLUS loans do not have a grace period, though some borrowers qualify for a postenrollment deferment period. Unless repayment is delayed or deferred, the first loan payment is due within 60 days of the final disbursement of the PLUS loan. Trainer s Tidbit The PLUS MPN permits the enrolled parent or student borrower to request in-school deferment at the time the borrower is completing the MPN, based on the borrowers's own qualifying enrollment. The MPN also allows the student PLUS loan borrower to request post-enrollment deferment while completing the form. The MPN does not facilitate requests for: u In-school deferment for the parent PLUS borrower who is not enrolled and is requesting deferment based on the enrollment status of the student beneficiary. u Post-enrollment deferment for the parent borrower that follows either the parent s or the student s qualifying period of enrollment. These borrowers must contact their servicers to request in-school deferment based on the students enrollment and any period of post-enrollment deferment. 15
Repayment Options 34 CFR 682.209. 34 CFR 682.215. 34 CFR 685.208. 34 CFR 685.209. 34 CFR 685.210. 34 CFR 685.221. Several repayment options are available to borrowers of subsidized and unsubsidized for PLUS loans. Borrowers may change repayment plans as often as they wish, as long as they are eligible for the plan selected. A publication describing student loan repayment options appears in the Appendix. Trainer s Tidbit Repayment calculators are available to help borrowers compare repayment options, including: u U.S. Department of Education Calculators and Interest Rates (www.ed.gov/offices/osfap/directloan/calc.html). u U.S. Department of Education Repayment Comparison Calculator (http://studentaid.ed.gov/repayloans/understand/plans/standard/comparison-calculator). u USA Funds Loan Repayment Calculator (http://calculator.usafunds.org/). Loan Counseling Entrance Counseling At or prior to the disbursement of the first federal education loan installment, schools must ensure that first-time studentborrowers of Direct Subsidized, Unsubsidized or PLUS loans receive simple and understandable information about the loan terms and conditions and the student's responsibilities. Some schools consider entrance counseling to be a continual process and provide information to students throughout their enrollment. Ongoing communication about their loans enables students to make informed borrowing decisions and remain aware of their overall loan debt and the implications of that debt upon repayment. Exit Counseling Financial aid administrators are required to conduct exit interviews or exit counseling for every student at the school who borrowed a subsidized or unsubsidized loan, and effective Aug. 14, 2008, for every student who obtains a Grad PLUS loan, shortly before the student ceases to be enrolled at least half-time, even if the student does not graduate. Schools must ensure that exit counseling is provided to students who leave the school without officially withdrawing. Counseling may be provided by interactive electronic means or by mailing exit counseling materials within 30 days after learning the students have withdrawn or failed to complete exit counseling. Trainer s Tidbit 34 CFR 685.304. Electronic Announcement, May 16, 2013. Loan counseling for first-time borrowers on or after July 1, 2013, must include information related to the interest subsidy limitation. Specific requirements are outlined in the Appendix. 16
Trainer s Toolkit The Trainer s Toolkit is a listing of terms, websites and reference material directly related to Federal Direct Loans: The Basics. References, Resources and Websites Federal Legislation or Regulations Final Regulations: Direct Loans 150% Subsidized Loan Limit 79 FR 3108-3120. Jan. 17, 2014. www.ifap.ed.gov/fregisters/fr011714.html. Final Rule for the Title IV Student Loan Programs 78 FR 65767-65842. Nov. 1, 2013. www.ifap.ed.gov/fregisters/fr110113finalruleforthetitleivstudentloanprograms.html. FY 2014 Department of Education Justifications of Appropriation Estimates to Congress: Student Loans Overview www2.ed.gov/about/overview/budget/budget14/justifications/s-loansoverview.pdf. Smarter Solutions for Students Act of 2013 P.L. 113-28. Aug. 9, 2013. http://thomas.loc.gov. Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program Federal Register, Vol. 77, No 212. http://ifap.ed.gov/fregisters/fr110112finalrule.html. MAP-21 P.L. 112-141. July 6, 2012. http://thomas.loc.gov. Budget Control Act of 2011 P.L. 112-25. Aug. 2, 2011. www.gpo.gov/fdsys/pkg/plaw-112publ25/html/plaw-112publ25.htm. Consolidated Appropriations and Access Act, 2012 P.L. 112-74. Jan. 5, 2011. www.gpo.gov/fdsys/pkg/bills-112hr2055enr/pdf/bills-112hr2055enr.pdf. Program Integrity Final Rules Oct. 29, 2010. www.ifap.ed.gov. Health Care and Education Reconciliation Act of 2010 P.L. 111-152. March 30, 2010. http://thomas.loc.gov. 17
Higher Education Act Technical Corrections Bill of 2009 P.L. 111-39. July 1, 2009. http://thomas.loc.gov. Higher Education Opportunity Act (HEOA) of 2008 P.L. 110-315. Aug. 14, 2008. http://thomas.loc.gov. College Cost Reduction and Access Act of 2007 P.L. 110-84. Jan. 4, 2007. www.gpo.gov/fdsys/pkg/bills-110hr2669enr/pdf/bills-110hr2669enr.pdf. U.S. Department of Education 2015-2016 ISIR Guide Oct. 7, 2015. http://ifap.ed.gov/isirguide/1516isirguide.html. 2015-2016 Federal Student Aid Handbook Application and Verification Guide. Volume 1: Student Eligibility. Volume 3: Calculating Awards and Packaging. Volume 4: Processing Aid and Managing Federal Student Aid Funds. www.ifap.ed.gov. 150 Percent Direct Subsidized Loan Limit Information Provides information and updates related to the 150 Percent Loan Limit. www.ifap.ed.gov/150percentdirectsubsidizedloanlimitinfo/index.html. 150% Direct Subsidized Loan Limit Frequently Asked Questions http://ifap.ed.gov/150percentdirectsubsidizedloanlimitinfo/faq.html. FFEL Variable Interest Rates Subject: Federal Stafford, Federal PLUS, Federal SLS, and Federal Consolidation Interest Rate Calculations for the Period July 1, 2015-June 30, 2016. June 30, 2015. http://ifap.ed.gov/ffelvarrates/attachments/063015ffelvarinterratesperiodjuly1june30.pdf. Dear Colleague Letter GEN-15-07 Subject: FY 2016 Sequester Required Changes to the Title IV Student Aid Programs. April 23, 2015. www.ifap.ed.gov/dpcletters/gen1507.html. Dear Colleague Letter GEN-15-06 Subject: Loan Counseling Requirements and Flexibilities. April 6, 2015. www.ifap.ed.gov/dpcletters/gen1506.html. Dear Colleague Letter GEN-14-10 Subject: FY 2015 Sequester Required Changes to the Title IV Student Aid Programs. May 2, 2014. http://ifap.ed.gov/dpcletters/gen1410.html. Dear Colleague Letter GEN-13-22 Subject: FY 2014 Sequestration Changes to the Title IV Student Aid Programs (Updated October 25, 2013). Oct. 17, 2013. http://ifap.ed.gov/dpcletters/gen1322.html. 18
Dear Colleague Letter GEN-13-13 Subject: Reporting of Academic Year and Loan Period to COD for Direct Loans. May 10, 2013. http://ifap.ed.gov/dpcletters/gen1313.html. Dear Colleague Letter GEN-12-01 Subject: Changes Made To The Title IV Student Aid Programs By The Recently Enacted Consolidated Appropriations Act, 2012. Jan. 18, 2012. http://ifap.ed.gov/dpcletters/gen1201.html. Dear Colleague Letter GEN-11-07 Subject: Guidance on Participation in the William D. Ford Federal Driect Loan (Direct Loan) Program. March 22, 2011. http://ifap.ed.gov/dpcletters/gen1107.html. Dear Colleague Letter 96-L-186 Subject: Clarification and interpretative guidance on certain provisions in the Federal Family Education Loan (FFEL) Program regulations published on Dec. 18, 1992. March 1, 1996. http://ifap.ed.gov/dpcletters/doc0628_bodyoftext.htm. Electronic Announcement Subject: Federal Stafford, Federal PLUS, Federal SLS, and Federal Consolidation Interest Rate Calculations for the Period July 1, 2015 - June 30, 2016. May 27, 2015. http://ifap.ed.gov/ffelvarrates/052715ffelvarinterrateperiodjuly1june30.html. Electronic Announcement Subject: Interest Rates for Direct Loans First Disbursed between July 1, 2015 and June 30, 2016. May 15, 2015. http://ifap.ed.gov/eannouncements/051515dlinterestrates1516.html. Electronic Announcement Subject: 150% Direct Subsidized Loan Limit Electronic Announcement #8 Final Regulations Published. Jan. 17, 2014. www.ifap.ed.gov/eannouncements/011714revisedfinalregulationspublished150percenteanum8.html. Electronic Announcement Subject: Packaging and Repackaging of Title IV Student Aid. Sept. 11, 2012. www.ifap.ed.gov/eannouncements/110912packagingandrepackagingtitleivstudentaid.html. Electronic Announcement Subject: Direct Loan Interest Rates and Changes to Student Eligibility for the Direct Subsidized Loans. July 10, 2012. http://ifap.ed.gov/eannouncements/071012interestratefinal.html. Electronic Announcement Subject: Origination Fee and Up-Front Interest Rebate Reductions for Direct Subsidized Loans and Direct Unsubsidized Loans. Feb. 4, 2010. www.ifap.ed.gov/eannouncements/020410orgfeeupfrontirrdld.html. NSLDS Newsletter Newsletter 11: Consolidation Loans and Aggregate Calculations. Feb. 9, 2006. www.ifap.ed.gov/nsldsmaterials/nsldsnewsletter11.html. 19
Direct Loan Bulletin New Repayment Incentive Benefits First Question & Answer Document. DLB-00-48. October 2000. www.ifap.ed.gov/dlbulletins/doc0276_bodyoftext.htm. USA Funds Federal Student Loan Interest Rate Update www.usafunds.org/usafunds%20resourcelibrary/interestratechart.pdf. Federal Student Loan Interest Rates for Loans Issued 1998-2015 www.usafunds.org/usafunds%20resourcelibrary/expandedinterestratechart.pdf. Student Loan Repayment: Four Steps to Take Now www.usafunds.org/usafunds%20resourcelibrary/studentloanrepayment.pdf. Annual Aggregate Loan Limit Chart www.usafunds.org/usafunds%20resourcelibrary/annualaggregateloanlimits.pdf. Webcast Recording Archives www.usafunds.org/trainingpolicysupport/pages/webcastarchives.aspx. Other Resources The College Board Trends in Student Aid 2014. http://trends.collegeboard.org/student-aid. 20
Appendices Appendix A Parent PLUS Loan Denial Issues Appendix B Student Loan Repayment: Four Steps to Take Now Appendix C Entrance Counseling Requirements Appendix D Exit Counseling Requirements 21
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Appendix A Parent PLUS Loan Denial Issues Parent PLUS Loan Denial Issues 34 CFR 665.203(c). Dear Colleague Letter 96-L-186. Accurate as of: May 5, 2015 A dependent student s eligibility for Direct Unsubsidized loan funds increases when a parent is unable to obtain Direct PLUS loan funds. The increased unsubsidized loan eligibility may result from: Denial of a parent PLUS loan due to adverse credit. Exceptional circumstances such as: The parent is incarcerated. The parent s whereabouts are unknown. A bankruptcy action prevents the parent from incurring additional debt. The parent demonstrates an inability to repay the loan due to income limitations. The parent otherwise is not an eligible PLUS loan borrower. Examples include the parent s not being a U.S. citizen or not being a permanent resident. How long is a PLUS loan credit denial valid? Per the U.S. Department of Education, the denial applies to the entire academic year. What loan amount can the school originate for a student whose parent is unable to obtain a PLUS loan? When a parent is unable to obtain a PLUS loan, the school must treat a dependent student as independent for both annual and aggregate loan limits. The school may originate additional unsubsidized loan funds up to the annual loan limit applicable to an independent student at the same grade level. For example, a grade level-two dependent student who normally would be eligible for $6,500 in Direct loans instead would be eligible for up to $10,500, which includes $4,000 in additional Direct Unsubsidized loan funds. What if a parent originally is unable to obtain a PLUS loan but then is approved later in the academic year? If a parent is initially unable to obtain the PLUS loan, but later is approved or another eligible parent is approved for a PLUS loan, the school again must treat the student as dependent. There are three possible scenarios the school may encounter when it becomes aware of the PLUS loan approval: The school has not yet disbursed any of the additional unsubsidized loan funds awarded due to the PLUS loan denial. The school must cancel/return all of the additional unsubsidized loan funds. The school has disbursed some, but not all, of the additional unsubsidized loan funds awarded due to the PLUS loan denial. The school must cancel/return the undisbursed additional unsubsidized funds. The student may retain any monies already disbursed. The school has disbursed all of the additional unsubsidized loan funds awarded due to the PLUS loan denial. The student may retain any monies already disbursed. Can a school process an additional unsubsidized loan due to PLUS loan ineligibility and a parent PLUS loan for a student for the same academic year? Yes. While a school may not initially originate both loans for the same student for the same academic year, a subsequent denial or approval could result in the school s processing both loans for the same academic year. Note, however, that when the school calculates the amount of the new loan for the same period, it must include as estimated financial assistance any of the additional Direct Unsubsidized or PLUS loan funds that it disbursed in that period. 23
Consider these scenarios: The parents of the following grade level-two dependent students applied for parent PLUS loans for the academic year (two payment periods in length). Based on results of each parent s request for PLUS loan funds, the school must take the following actions: Payment Period 1 Payment Period 2 Student A Parent PLUS loan denied for the academic year but later approved in payment period 1 for the entire academic year. Award $4,000 in additional unsubsidized loan funds ($2,000 for each payment period). Once the PLUS loan is approved, cancel/return undisbursed additional unsubsidized loan funds for the academic year. Determine the amount of PLUS loan eligibility for the academic year, counting any disbursed additional unsubsidized loan funds as EFA for the period. Undisbursed unsubsidized loan funds already are canceled for the academic year. Student B Parent PLUS loan denied for the academic year but later approved for payment period 2 only. Award $4,000 in additional unsubsidized loan funds for the academic year ($2,000 for each payment period). Cancel/return undisbursed additional unsubsidized loan funds for both payment periods. Determine the amount of PLUS loan eligibility for payment period 2. Unsubsidized loan funds disbursed for payment period 2 count as EFA for the period; those not disbursed do not count as EFA. Student C Parent PLUS loan denied for the academic year but later approved in payment period 2 for the academic year. Award $4,000 in additional unsubsidized loan funds for the academic year ($2,000 for each payment period). Cancel/return undisbursed additional unsubsidized loan funds for payment periods 1 and 2. Determine the amount of PLUS loan eligibility for the academic year (retroactive to payment period 1). Count disbursed additional unsubsidized loan funds as EFA during payment periods 1 and 2. Student D Parent PLUS loan approved for payment period 1, but parent PLUS loan denied for payment period 2. Award parent PLUS loan funds for payment period 1. Determine the amount of additional unsubsidized loan eligibility for payment period 2. No PLUS loan funds count as EFA for payment period 2; none were disbursed for the period. 24