PublicationTitle: Entrance Counseling Guide for Borrowers
Your William D. Ford Federal Direct Loans(Direct Loans) are made
directly to you by the federal government through the U.S.
Department of education (ED). These loans are managed by the
Direct Loan Servicing Center, a contracted agent operating under the
direction of the U.S. Department of Education. The Servicing Center
will oversee your loan account until your loans are paid in full.
However, you are the real loan manager because you have
the sole responsibility for repaying your loans. This
Entrance Counseling Guide for Borrowers (Borrowers'
Guide) contains useful tips to help you develop a budget
for managing your education expenses and financial
resources. It also provides important information to help
you manage and repay your loans.
This Borrowers' Guide provides the basic facts about
subsidized Federal Direct Stafford/Ford Loans (Direct
Subsidized Loans) and Federal Direct Unsubsidized
Stafford/Ford Loans (Direct Unsubsidized Loans) and
explains your rights and responsibilities as a borrower.
Please remember, if you have any questions or concerns
about your loan, your school's financial aid office and the
Direct Loan Servicing Center are there to help. The
toll-free number for the Servicing Center, Borrower
Services is 1-800-848-0979.
You have taken an important step toward your future. We
hope this Borrowers' Guide will help you successfully
manage your education loans.
FACTS ABOUT YOUR DIRECT LOANS
What are Direct Subsidized Loans and Direct
Direct Subsidized Loans and Direct Unsubsidized Loans
are made to students attending school at least half-time.
The U.S. Department of Education is the lender. It delivers
the loan money to you through your school.
A student qualifies for a Direct Subsidized Loan based on
financial need, as determined under federal regulations. A
student's need is not a factor in determining eligibility for
a Direct Unsubsidized Loan. Students may qualify for a
Direct Unsubsidized Loan regardless of their or their
families' incomes. It is possible for a student to have a
Direct Subsidized Loan and a Direct Unsubsidized Loan
for the same award year.
All of your Direct Loans will be in one account, making
repayment easier. You (or your parents) will have only one
account, one monthly payment, and one point of contact
for all of your loans.
How much can I borrow?
For Direct Subsidized Loans and Direct Unsubsidized
Loans, you are subject to annual and aggregate (combined
total) loan limits on the basis of the following:
-your academic level (freshman, sophomore, and so on),
-your status as a dependent student or an independent
-the length of the academic program in which you are
The chart on the next page will help you determine the
annual and aggregate amounts you are eligible to borrow.
What are the interest rates?
The interest rates for both Direct Subsidized and Direct
Unsubsidized Loans are variable and are adjusted once a
year, on July 1. The rate will never exceed 8.25 percent for
students. For parents the maximum rate is 9 percent.
Before the beginning of the repayment period and during
authorized periods of deferment (see pages 8 and 9), the
interest rate is equal to the 91-day Treasury bill rate plus
For Direct Subsidized and Unsubsidized Loans in
repayment, the interest rate is equal to the 91-day
Treasury bill rate plus 3.1 percent.
If you have a Direct Subsidized Loan, the federal
government does not charge you interest while you are
enrolled in school at least half-time, during the six-month
grace period, or during deferments.
If you have a Direct Unsubsidized Loan, interest will be
charged beginning the day the loan is paid (disbursed)
to you until the day the loan is repaid in full. You may
pay the accumulating interest while you are in school,
during the grace period, or during deferment, or you have
the option of capitalizing the interest. Whichever option
you choose, you are responsible for paying the full
amount of all interest on a Direct Unsubsidized Loan.
What is capitalizing interest?
Capitalizing interest means adding unpaid, accumulated
interest to the principal balance of a loan (that is, to the
total amount borrowed). The borrower of a Direct Unsubsidized
Loan has the choice of paying the interest on an ongoing basis or
having the interest capitalized. Unpaid interest will be capitalized
whenever your borrower status changes--for instance, when you
Interest costs on a Direct Unsubsidized Loan begin accumulating the
date the loan money is disbursed and continue to accumulate until
the principal and interest are paid in full. Capitalizing interest is a
way to postpone making interest payments. Keep in mind that
capitalization also increases the total cost of your loan.
If you choose to have the interest on your loan capitalized, the total
amount you repay will be greater than if you pay the interest while
you are in school, during the grace period or during deferment.
The example above shows what happens if you pay the interest on a
Direct Unsubsidized Loan on an ongoing basis and what happens if
you allow it to be capitalized.
What is the loan fee?
The loan fee is another expense of borrowing a Direct Loan. The
loan fee charged for Direct Subsidized and Unsubsidized Loans is
4 percent of the amount you borrow. The loan fee is subtracted
from the loan money before it is disbursed to you.
What are my repayment options?
You have four repayment options:
Standard Repayment Plan
With Standard repayment, you will make a fixed payment of at least
$50 a month for up to 10 years. For some borrowers, this plan
results in the lowest total interest paid because the repayment period
is shorter than it would be under the other plans. In general, the
shorter the repayment period, the lower the total interest expense
for the borrower.
Extended Repayment Plan
Under Extended repayment, you will still have minimum monthly
payments of $50, but you can take from 12 to 30 years to repay your
loans. The length of your repayment period will depend on the total
amount you owe when your loans go into repayment. (See the
adjacent box.) Because you take more than 10 years to repay your
loans, your monthly payment will be less than if you choose
Standard repayment. However, the total amount you repay will be
greater because you will pay more interest.
Graduated Repayment Plan
With Graduated repayment, your payments start out at one level,
then increase every two years. The repayment period varies from
12 to 30 years and depends on the total amount of Direct Loans you
owe when your loans go into repayment. (See the box below.) If
your income is low when you leave school but is likely to increase
steadily over time, this might be the best plan for you.
Income Contingent Repayment Plan
This plan gives you the flexibility to meet your Direct Loan
obligations without causing undue financial hardship Each year, your
monthly payment amount will be calculated on the basis of your
annual Adjusted Gross Income (AGI) and the total amount of your
Direct Loans. To participate in the Income Contingent Repayment
Plan, you must authorize the U.S. Internal Revenue Service (IRS) to
release information about your income to the U.S. Department of
Education. This information will be used to calculate and adjust your
repayment amount annually.
If your payments do not cover the accumulated interest on your loans,
the unpaid interest will be capitalized once each year until it reaches
a maximum of 10 percent of the original amount you owed when
your loans entered repayment. After you reach this maximum,
interest will continue to accrue and be payable, but will no longer be
capitalized. The additional interest will increase the amount you owe
and may extend your repayment period. (This limit on capitalization
does not apply to periods of deferment and forbearance.)
The maximum repayment period is 25 years. If you make payments
under the Standard Repayment Plan or the Extended Repayment Plan
and then switch to the Income Contingent Repayment Plan, all of
these periods are counted toward your 25-year repayment period. If
you have not fully repaid your loans after 25 years under Income
Contingent Repayment, the unpaid portion will be discharged
(canceled). However, you will have to pay taxes on the amount
If you do not choose a repayment plan, your loans will be placed in
the Standard Repayment Plan. If none of the repayment plans meet
your needs because you have exceptional circumstances, the Direct
Loan Servicing Center may provide an alternative repayment plan.
Can I combine my loans to make repayment easier?
Yes--you might want to consider a Federal Direct Consolidation
Loan to simplify repaying your loans.
Any Direct Subsidized Loans, subsidized Federal Stafford Loans,
Guaranteed Student Loans (GSLs), Federal Insured Student Loans
(FISLs), Federal Perkins Loans, National Direct Student Loans,
National Defense Student Loans, subsidized Federal Consolidation
Loans, and other Direct Subsidized Consolidation Loans can be
combined into one Direct Subsidized Consolidation Loan. Any Direct
Unsubsidized Loans, unsubsidized Federal Stafford Loans, Federal
Supplemental Loans for Students (SLS), Auxiliary Loans to Assist
Students (ALAS), Health Professions Student Loans (HPSLs), Health
Education Assistance Loans (HEAL), Loans for Disadvantaged
Students (LDS), Nursing Loans made under Subpart II of Part B of
Title VIII of Public Services Health Act, Federal Consolidation
Loans, and other Direct Unsubsidized Consolidation Loans
can be combined into one Direct Unsubsidized Consolidation Loan.
For more information about Direct Consolidation Loans or in-school
consolidation, contact your financial aid office or call ED's
Consolidation toll-free number, 1-800-557-7392.
When do I begin repayment?
After you graduate, leave school, or drop below half-time
enrollment, you have six months before you must begin
repayment. This is called a grace period. If you return to school at
least half-time before that six month period ends, you may
postpone repayment while you are in school. The repayment of your
Direct Subsidized Loan or Direct Unsubsidized Loan will again be
delayed for six months following the day you graduate, leave school,
or drop below half-time enrollment. If you enroll at another school,
you must contact the Direct Loan Servicing Center and/or the lender
or servicer of any federal student loans (including FFEL Program loans)
you may have to obtain deferments (see next section).
If you have a Direct Subsidized Loan, you will not be charged
interest during grace periods or while you are enrolled in school at
least half-time. If you have a Direct Unsubsidized Loan, you
will be responsible for paying interest during in-school or grace
periods, unless you choose to have the interest capitalized.
Note: The first actual payment is due within 60 days after the grace
You will receive more detailed information about repayment during
Can I prepay my loan?
Yes--you may prepay all or part of the unpaid balance on a loan at
any time without penalty. If you have more than one Direct Loan, be
sure to specify which loan you are prepaying.
What if I have problems repaying my loan?
If you have a problem making a payment on your loan as scheduled,
contact the Direct Loan Servicing Center immediately. The Servicing
Center will work with you to help you avoid the costs and adverse
consequences of delinquency, which could result in default on your
Direct Loans. Deferment and forbearance are options that can help
you avoid default. These postponement options are described in
detail in the segments that follow.
A deferment allows you to temporarily postpone payment on your
loans. During deferment of Direct Subsidized Loans, principal
payments are postponed, and interest is not charged. In the case
of Direct Unsubsidized Loans, principal payments are postponed, but
interest is charged during the deferment period. The interest may be
paid monthly or you may choose to have it capitalized (see page 4).
Deferments may be available to you if you are:
--pursuing at least half-time study at an eligible school;
--in a graduate fellowship program approved by the U.S.
Department of Education;
--in a rehabilitation training program, for individuals with disabilities,
approved by the U.S. Department of Education;
--conscientiously seeking but unable to find full-time employment
(for up to three years); or
--experiencing economic hardship (for up to three years).
These deferments apply to all Direct Loans.
Other deferments may be available to you as a Direct Loan borrower.
If, at the time you obtain a Direct Loan, you have an outstanding
balance on a Federal Stafford Loan, Guaranteed Student Loan GSL),
Federal Insured Student Loan (FISL), Federal PLUS Loan, Federal
Supplemental Loans for Students (SLS) Loan, Auxiliary Loans to
Assist Students (ALAS) Loan, or Federal Consolidation Loan
borrowed before July 1, 1993, you can also defer your Direct Loan:
-while serving in the U.S. Armed Forces, in the Commissioned
Corps of the Public Health Service, or in the Peace Corps (for up to
-while serving as a full-time paid volunteer for the ACTION
programs, or an approved tax-exempt organization (for up to
-while you are "temporarily totally disabled" according to the
certification of a qualified physician, or while unable to work
because you must care for a spouse or other dependent who is
temporarily totally disabled (for up to three years);
-while serving in an internship or residency required to begin
professional practice (for up to two years);
-while serving in the National Oceanic and Atmospheric
Administration Corps (for up to three years);
-while teaching full-time in a public or nonprofit private elementary
or secondary school in an area the U.S. Department of Education has
determined to be a teacher shortage area (for up to three years);
-if you are a mother of a preschool-age child and you have entered
or re-entered the workforce within the preceding year in a full-time
position at a salary not more than $1 above the minimum wage (for
up to one year); or
-for parental leave for each period during which you are pregnant,
you are caring for your newborn child, or you are caring for your
newly adopted child (for up to six months). You must be
unemployed, must not be a student, and must apply within six
months after you leave school or drop below half-time status.
To receive a deferment, you must apply for one through the Direct
Loan Servicing Center. Contact the Servicing Center to request a
deferment form. The Servicing Center will send you the form that
is appropriate for your situation.
Forbearance is a temporary postponement or reduction of loan
payments for a limited and specified period or an extension of the
you have to make your loan payments. You may qualify for
forbearance if you are:
--unable to make loan payments due to poor health or other
acceptable reasons, and you do not meet a deferment condition;
--serving in a medical or dental internship or residency;
--serving in a position under the National and Community Service
Trust Act of 1993; or
--obligated to make payments on federal student loans that are equal
to or greater than 20 percent of your total monthly gross income (for
up to three years).
In a period of forbearance, interest will be charged and, unless it is
paid, will be added to the principal balance of your loans (see the
description of capitalized interest on page 4). This will increase the
amount you owe.
Can my Direct Loan debt ever be discharged (canceled)?
A discharge (cancellation) releases you from all obligation to repay
the loans. You can receive a discharge only with proof of:
-total and permanent disability (this cannot be for a condition that
existed at the time you applied for Direct Loans, unless a doctor
certifies that the condition substantially deteriorated after the
loans were made);
-inability to complete a course of study because your school closed
(under certain circumstances) or because your eligibility was falsely
certified by the school;
-bankruptcy (in certain cases); or
In addition, some loans may not have to be repaid if you claim, as a
defense against repayment, that the school did something wrong or
failed to do something it should have done. You may make a claim
as a defense against repayment only if what the school did or did not
do resulted in legal action being taken against the school, under state
You may not avoid repaying your loans because you
-did not complete the program of study at the school (for reasons
other than school closure or false certification of loan eligibility);
-did not like the school or the program of study; or
-did not obtain employment after completing the program of study.
What happens if I do not repay my loan?
If you fail to make loan payments on time or if you default on your
loans, the consequences are serious:
-The entire unpaid balance and accrued interest on your loan
would be immediately due and payable.
-You will lose your deferment options.
-You will not be eligible for further federal student financial
-Your account may be turned over to a collection agency, increasing
your total debt by late fees, additional interest, court costs, collection
fees, attorney's fees, and other costs.
-Your debt will be reported to credit bureaus as delinquent, which
may damage your credit rating.
-The federal government can take your federal tax refunds.
-Your employer, at the request of the federal government, can
withhold (garnish) part of your wages and give them to the federal
-The federal government can take legal action against you.
Don't let any of these happen to you!
Remember, if you are having trouble making your payments, call the
Direct Loan Servicing Center at 1-800-848-0979. The Servicing Center
will work with you to help you avoid default.
What are my responsibilities while I am in school?
While enrolled in school, you must notify your school's financial
aid office if any of the following events takes place:
-You reduce your enrollment status to less than half-time.
-You withdraw from school.
-You stop attending classes.
-You fail to reenroll for any term.
-You have a change in your expected graduation date.
-You change your name and/or local or permanent address.
What should I do about y loan if I am a transfer student?
If you transfer to another school and you will be enrolled at least
half-time, contact the Direct Loan Servicing Center to request an
in-school deferment. (You are not eligible for this deferment if you
are enrolled less than half-time.) When you receive the deferment
form, complete the borrower's section and submit the form to your
current school. The school will complete the form and return it to the
If you still owe money on any other federal student loans (including
Federal Family Education Loans and Federal Perkins Loans), contact
your lender or its servicer to get an in-school deferment form.
complete and return the form to your school, which will return it to
Remember: Keep in contact with the Direct Loan Servicing Center
and other holders of your education loans, (if applicable) until all
your loans are repaid.
BUDGETING YOUR MONEY
Many students start college or career school having had little or no
personal experience with loans, credit cards, living expenses, or
budgeting. However, understanding and practicing effective money
management will help you while you are in school and might also
help you more successfully manage your money after you leave
What is budgeting?
Budgeting is the process of planning for the most effective use
of your financial resources by defining your expected monthly
expenses (such as rent, groceries, telephone, and student loan
payments) and the resources you expect to have available (such as
your earnings) to pay those expenses.
How does the school calculate my cost of attendance?
When your school determined your federal financial aid award,
it used a standard budget to estimate the expenses you would
incur while attending school. This expense estimate is referred
to as your cost of attendance (COA). The school's COA must
meet federal government requirements for estimating students' expenses.
The dollar figure the school used to determine your financial need
was equal to the school's estimated COA minus your Expected
Family Contribution (EFC). To determine your eligibility for
a Direct Subsidized Loan, the school also subtracted any other
financial aid you will be receiving.
COA minus EFC and Other Financial Aid equals Your Loan
Eligibility for a Direct Unsubsidized Loan is determined differently--
your EFC is not taken into account in the calculation.
The school's COA is likely to be a fairly good estimate of your
expenses. However, you might spend more or less than the school
estimates on variable expenses. Tuition and fees are fixed costs
that are likely to remain the same for the entire school year, but
some expenses, such as books and supplies, room and board,
transportation, and personal expenses, are variable ones. For
example, you might reduce housing expenses by sharing an
off-campus apartment with a roommate or reduce book expenses
by purchasing used textbooks.
How can I reduce the amount I need to borrow?
If you can reduce your expenses to an amount less than the school's
estimated COA, you might not need to borrow as much as the school
has awarded you. It's a wise idea to borrow only what you need.
If you borrow less than the school awarded you, you might have
lower monthly payments when you repay the loan. This will leave
you more money for transportation, housing, and other kinds of
expenses associated with beginning your career.
Another way to reduce what you need to borrow is to identify
non-loan sources of financial assistance. Some alternatives to
borrowing are listed below:
Family and Friends: You might have relatives and friends
who are willing and able to help you. An extra $10 or $15 a
week from a family member or friend can add up over a period of
months or years.
Special Scholarships: Many organizations award special
scholarships. It may not be easy to find scholarships for which
you qualify; however, the effort you put into finding them can really
pay off. Remember, every little bit helps, and these monies do not
need to be repaid.
You should check with the financial aid office about institutional and
non-institutional scholarships and how to apply for them.
Some other places to look for ideas and assistance on scholarships
-library reference books and computer programs,
-your employer or your parents' employers, and
-civic and social organizations to which you or your relatives
Part-Time Employment: A sure way to help pay for college and
avoid excess borrowing is to work part-time. Three reasons to opt
for part-time employment are:
-Studies show that students who work while going to school
do better in their courses than students who don't work.
-Working can provide you with valuable experience and skills
needed for a career.
-A part-time job provides a steady income that can help pay for rent,
groceries, and other expenses.
How do I set up my budget?
The worksheet on page 17 will help you create a budget for school
expenses and assess the resources you have to meet those expenses.
After establishing a budget, you need to monitor your actual
expenditures so that you can make any needed adjustments in your
spending before finding yourself in a financial crisis. The three main
steps in creating an in-school budget are:
1. Calculate your total expenses. First, estimate your total yearly
expenses. Tuition and fees are fixed cost items, but costs such as
books and supplies are variable and can be more easily reduced.
Your total yearly expenses can be calculated on the basis of
9 months or 12 months.
-If you live on campus and go home for the summer, a 9-month
budget might be more appropriate.
-If you are a commuting student who works year-round, a
12-month budget might be the most useful.
When using the worksheet, remember that all the expenses and
resources you are comparing should be for the same period of time,
9 months or 12 months.
To determine your expenses, you will need to begin by compiling
basic financial information. Your checkbook, school bills, and other
monthly bills are a good place to start.
Keep a day-to-day record of other expenses, such as personal items,
clothing, and entertainment, for a month or so to help you to make
2. Calculate your total resources (income).
To estimate your total available income for the year, you will need
to consider all of your resources. In calculating your resources, use
the same year length that you used when figuring your
expenses--either 9 months or 12 months.
-Include family assistance, grants and scholarships, savings,
earnings, loans, and any other income.
-If you work during summer vacation, you should include savings
from those earnings as a part of your resources for the next year.
Your financial aid award letter, pay stubs, and bank account
statements will help you calculate your available resources.
3. Determine the balance. The difference between your available
resources and your expenses (resources minus expenses) determines
your balance. Figuring the balance helps you determine if you need
all the money you are allowed to borrow.
If your balance is a negative dollar amount--in other words, your
resources are less than your expenses--then explore possible new
financial resources and reevaluate your expenses to determine
how they can be reduced. Many expenses depend on individual
life-styles and can be adjusted to reflect your available
resources. For instance:
-It might be less expensive to live at home with your parents
than to move into campus housing.
-If you live off campus, it will be less expensive to share housing
with roommates than live alone.
-Cooking in can be inexpensive compared to eating meals out.
If your total resources are greater than your total expenses--in other
words, the balance is a positive dollar amount--then you should see
your school's financial aid administrator about the possibility of
reducing your loan amount, even if you have already received
some of the money. Remember that if you can lower the amount you
borrow now, you will have less to repay later.
IMPORTANT THINGS YOU SHOULD FIND OUT
- What is the average indebtedness and average monthly
payment amount for all students who have borrowed Direct Loans
to attend my school or enroll in my program of study?
- Where can I find a copy of my school's refund and repayment
- Where can I find a copy of my school's standards of satisfactory
- Where should I report address and name changes to update my
official records at my school?
- What is the telephone number of my school's financial aid office?
- How and when will my school make Direct Loan disbursements to
- What is the U.S. Department of Education's Direct Loan Servicing
Center's telephone number? What is the address?
- What is the address where prepayments or interest payments are
COMMON LOAN TERMS
academic year: The measure of the academic work to be
accomplished by a student each year as defined by the school.
For instance, at a school that uses terms, the academic year must
contain at least 30 weeks of instructional time in which a full-time
student is expected to complete at least 24 semester or trimester
hours, 36 quarter hours, or 900 clock hours.
borrower: Person responsible for repaying a loan who has signed
and agreed to the terms in the promissory note.
capitalizing interest: Adding accumulated interest to the loan
principal rather than having the borrower make interest payments.
Capitalizing interest increases the principal amount of the
loan and, therefore, the total cost of the loan.
default: Failure to repay a loan in accordance with the terms of the
deferment: The temporary postponement of loan payments.
delinquency: This occurs when payments are late or missed, as
specified in the terms of the promissory note and the selected
disbursement: When loan proceeds are paid by the school to the
student or parent borrower.
discharge (cancellation): The release of borrowers from their
obligations to repay their Direct Loans. Borrowers must meet certain
requirements to be eligible for discharges.
disclosure statement: Statement of the actual cost of a loan, including
the interest costs and the loan fee.
Direct Loan Servicing Center: The U.S. Department of Education's
agent contracted to collect Direct Loans and Servicing Center handle
deferments, repayment options, and consolidation.
Federal Direct Loan Program: The William D. Ford Federal Direct
Loan Program, also referred to as Direct Loan Program, is a federal
program that provides loans to student and parent borrowers directly
through the U.S. Department of Education. The loans are Federal
Direct Stafford/Ford Loans, Federal Direct Unsubsidized
Stafford/Ford Loans, Federal Direct PLUS Loans, and Federal
Direct Consolidation Loans.
Federal Direct Stafford/Ford Loan: Also referred to as
Direct Subsidized Loan. A federally financed and subsidized
student loan made on the basis of the student's financial need and
other specific eligibility requirements. The federal government
does not charge interest on these loans while borrowers are
enrolled at least half-time, during a six-month grace period,
or during authorized periods of deferment.
Federal Direct Unsubsidized Stafford/Ford Loan: Also referred to
as Direct Unsubsidized Loan. A federally financed student loan made
to students meeting specific eligibility requirements. Interest is
charged throughout the life of the loan. The borrower may choose to
pay the interest charged on the loan or allow the interest to be
capitalized (added to the loan principal).
forbearance: An arrangement to postpone or reduce a borrower's
monthly payment amount for a limited and specified period, or to
extend the repayment period. The borrower is charged interest
during a forbearance.
grace period A six-month period before the first payment must
be made on a Direct Subsidized or Direct Unsubsidized Loan. The
grace period starts the day after a borrower ceases to be enrolled at
least half-time. During the grace period on a Direct Unsubsidized
Loan, accumulating interest must be paid or it will be capitalized.
interest: A loan expense charged by the lender and paid by the
borrower for the use of borrowed money. The expense is calculated
as a percentage of the principal amount (loan amount) borrowed.
loan: Money borrowed that must be repaid.
loan fee: An expense of borrowing deducted proportionately from
each loan disbursement.
loan postponement: See deferment and forbearance.
loan principal: The total sum of money borrowed.
prepayment: Any amount paid on a loan by the borrower before it is
required to be paid under the terms of the promissory note. There is
never a penalty for prepaying principal or interest on Direct Loans.
promissory note: A legally binding contract between a lender and a
borrower. The promissory note contains the terms and conditions of
the loan, including how and when the loan must be repaid.
repayment schedule: A statement provided by the Direct Loan
Servicing Center to the borrower that lists the amount borrowed, the
amount of monthly payments, and the date payments are due.
variable interest: Rate of interest on a loan that is tied to a stated
index and changes annually every July 1 as the index changes.