| AwardYear: 1996-1997 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs SectionNumber: SectionTitle: Introduction PageNumbers: 1-8 Part B of Title IV of the Higher Education Act of 1965 (the Act) created the guaranteed student loan programs. The Higher Education Amendments of 1992 (P.L. 102-325) reauthorized the Act and renamed the guaranteed student loan programs the Federal Family Education Loan (FFEL) Program. These program names have been changed: Federal Stafford Loans (formerly Guaranteed Student Loans), Federal PLUS loans, and Federal Consolidation Loans. These programs make long-term loans available to students attending institutions of higher education; vocational, technical, business, and trade schools; and some foreign schools. State or private nonprofit guaranty agencies insure FFEL Program loans and are reimbursed by the federal government for all or part of the insurance claims they pay to lenders. The federal guarantee on the loan replaces the security (the collateral) usually required for a long-term consumer loan. Note that although all guaranty agency programs must meet the federal requirements discussed in this chapter, INDIVIDUAL GUARANTY AGENCIES MAY HAVE ADDITIONAL REQUIREMENTS. To obtain specific information about a guaranty agencys procedures, contact that agency. Appendix A of this chapter contains a list of guaranty agencies and their addresses and telephone numbers. Stafford Loans are available to both undergraduate and graduate students. Formerly, the Federal Supplemental Loans for Students (SLS) Program provided loans for graduate or professional students and for independent undergraduates; however, the SLS Program has been merged into the unsubsidized Stafford Loan Program. (See Sections 3 and 4 of this chapter for more information about the elimination of the SLS Program). PLUS loans are for parents of dependent students. As for Federal Consolidation Loans, the following loans may be consolidated if the borrower meets certain conditions (discussed in Section 5): Stafford, SLS, Federal Insured Student Loans (FISLs), Federal Perkins Loans, PLUS loans, Health Education Assistance Loans, Health Professions Student Loans, and Nursing Student Loan Program loans. For a spousal (joint) consolidation, both the borrower and his or her spouse must meet the specified conditions. New legislation and changes to FFEL regulations, and other points of special interest, are highlighted in the chapter through use of margin notes and graphics. When Dear Colleague letters have been used to explain changes in the FFEL Programs, reference to the appropriate letter is made in the text. SUMMARY OF RECENT REQUIREMENTS AND INITIATIVES Two new major pieces of legislation affected the FFEL Program beginning with the 1994-95 academic year. The Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), sometimes called the Student Loan Reform Act, significantly changed the FFEL Program and set requirements for the implementation of the Federal Direct Student Loan (FDSL) Program. The Higher Education Technical Amendments of 1993 (P.L. 103-208) also significantly changed the FFEL Program by clarifying and expanding provisions of the Higher Education Amendments of 1992. The U.S. Department of Education (the Department) issued several regulations so that provisions in these laws could be implemented. In most cases, the publication dates and names of the regulations, published as Federal Register Final Rules, are referenced throughout this chapter. The William D. Ford Federal Direct Loan Program The Student Loan Reform Act of 1993 established a new loan program, the William D. Ford Federal Direct Loan (Direct Loan) Program. Participation in the program began in the 1994-95 academic year with 5% of new Direct Loan and FFEL volume. During the 1995-96 academic year, the Direct Loan Program increased substantially to 40% of new loan volume. The percentage of Direct Loan volume is expected to increase gradually over the next several academic years. A Federal Register notice published January 4, 1994 outlined the operations and procedures during the first year of the program. A notice published July 1, 1994 explained the repayment options and provisions available under the new program, including a description of the Federal Direct Consolidation Loan Program. A notice published December 22, 1994 superseded the July 1 provisions regarding income-contingent repayment for the first year of the program. A notice published December 1, 1994 provided program guidance for 1995-96 and beyond. In addition, a December 1, 1995 Direct Loan Final Rule further described origination functions and provided "new timelines for submission of loan records to the Direct Loan Servicer." A separate Direct Loan Final Rule also published December 1, 1995 amended the formula for the income-contingent repayment plan. Finally, a Student Assistance General Provisions Final Rule published December 1, 1995 describes default prevention measures for both the FFEL and the Federal Direct Loan Programs. Because the Direct Loan Program is separate from the FFEL Program, separate materials have been prepared for schools participating in the Direct Loan Program. No further discussion of Direct Loans will be provided here. For more information about the Direct Loan Program, you may write to the U.S. Department of Education Office of Postsecondary Education ROB-3, Room 4025 Direct Loan Task Force, Room 4025 600 Independence Ave. S.W. Washington, D.C. 20202-5162 Recent FFEL Program changes UNLESS OTHERWISE NOTED, THE EFFECTIVE DATE OF THE FEDERAL REGISTER FINAL RULES PUBLISHED DECEMBER 1, 1995 (REFERENCED THROUGHOUT CHAPTER 10) IS JULY 1, 1996. The effective date of the Institutional Eligibility Final Rule published on June 30, 1995 was July 31, 1995. These Final Rules established a number of new provisions which are summarized in the text below. SECTION 1: ELIGIBILITY Ability to benefit: A "Dear Colleague" letter (GEN-95-42) dated September 1995 provides clarification on ability-to-benefit (ATB) issues, specifically in reference to loan discharges based on ATB provisions. Also, a Final Rule on ATB provisions was published December 1, 1995. Consolidation loan eligibility: Defaulted loan borrowers now have the option of either agreeing to repay a consolidation loan under the income-sensitive repayment plan or establishing satisfactory repayment arrangements before qualifying for consolidation. This is contained in the December 1, 1995 FFEL Final Rule and is effective July 1, 1996 (as noted above). Repayment of excess loan amounts: Please note that a student (who is not in default) who has inadvertently obtained loan funds which exceed the annual or aggregate loan limits may still be eligible to receive federal student financial assistance if the student repays in full the excess loan amount, or makes satisfactory repayment arrangements with the loan holder to repay the excess loan amount. This is explained in a December 1, 1995 Federal Regulatory Review Final Rule. SECTION 2: FEDERAL STAFFORD LOANS Loan proration: The relationship between clock hours and credit hours, and its effect on loan proration, is further clarified in an August 1995 "Dear Colleague" letter (GEN-95-38). Establishment of withdrawal dates: As explained in the December 1, 1995 FFEL Final Rule, in the case of a student who does not return from a summer break, the school shall determine the students withdrawal date no later than 30 days after the next scheduled term. For the purpose of the schools reporting the students withdrawal date to a lender, the withdrawal date is the month, day, and year of the withdrawal date. Loan prepayment: If a lender receives a payment amount that equals or exceeds the normal monthly payment amount without instructions from the borrower as to its handling, the lender must apply the payment amount as a prepayment intended for a future installment by advancing the next payment due date. This is stated in the December 1, 1995 FFEL Final Rule. Default and eligibility for deferments: If a borrowers loan is in default, he or she is not eligible for any deferments on that loan--unless the borrower has made acceptable repayment arrangements with the lender prior to the payment of a default claim by a guaranty agency. This provision is contained in the December 1, 1995 FFEL Final Rule. SECTION 3: UNSUBSIDIZED FEDERAL STAFFORD LOANS No substantial changes. SECTION 4: FEDERAL PLUS LOANS Definition of parent: As explained in the December 1, 1995 Federal Regulatory Review Final Rule, the definition of a parent has been changed to include the spouse of a parent who remarried, if that spouses income and assets would have been taken into account when calculating a dependent students EFC. Bankruptcy issues: A September 1995 Dear Colleague Letter (GEN-95-40) explains that a PLUS applicant who has been the subject of a bankruptcy discharge during the five years preceding the date of the applicants credit report is considered to have an adverse credit history. Such an applicant can then either prove that extenuating circumstances exist, if applicable, or can find a creditworthy endorser. However, "a prospective endorser of a Federal PLUS loan may be considered as being insufficiently creditworthy because of a previous or pending bankruptcy." SECTION 5: LOAN REFINANCING AND CONSOLIDATION Consolidation loan eligibility As noted in the December 1, 1995 FFEL Final Rule, a borrower in default can qualify for a Federal Consolidation Loan if the borrower either agrees to repay the loan under the income-sensitive repayment plan or establishes satisfactory repayment arrangements before qualifying for consolidation. SECTION 6: COMPARING LOAN PROGRAMS Return of payments after loan discharge As stated in the December 1, 1995 FFEL Final Rule, if payments on the student loan account are received after the lender is notified by the guaranty agency of the discharge (on the basis of total and permanent disability, death, bankruptcy, false certification, or school closing), all of these payments must be returned to the sender of the payments. At the same time, the borrower must be notified that there is no further obligation to repay the loan. Regaining eligibility after default An upcoming "Dear Colleague" letter will clarify the status of borrowers who regain eligibility after default. Under FFEL, if the student regains eligibility during an enrollment period (if the sixth payment under a satisfactory repayment arrangement is made after the start of an enrollment period, for example), the student regains eligibility for the entire academic year in which he or she regained eligibility status. This provision became effective November 13, 1995. SECTION 7: THE LOAN APPLICATION PROCESS NSLDS and financial aid transcript information As noted in the December 1, 1995 Federal Regulatory Review Final Rule, the financial aid administrator must request a financial aid transcript from each institution that each student previously attended or must use National Student Loan Data System (NSLDS) information for each student (upon notification from the Department that the NSLDS may be accessed). The Department will be notifying schools through a "Dear Colleague" letter to be published in spring 1996 that the NSLDS may be used for the 1996-97 award year as an alternative to requesting a paper FAT. The DCL will also explain the procedures for using NSLDS for this purpose. An official notice will be published in the Federal Register soon after. Please note that an overview of NSLDS data functions and purposes was provided in "Dear Colleague" letter 95-L-177 published March 1995. Handling overawards The Department will not consider any "extra" loan amount (up to $30) to be an overaward if this extra amount is the result of the increase in early 1996 in the maximum Pell Grant award from $2,440 to $2,470. Note that schools must recalculate loans for students who were ineligible and became eligible only because of the increased maximum. Please refer to Chapter 4 for information on revised Pell Grant payment and disbursement schedules. SECTION 8: PAYMENT TO THE STUDENT Late disbursement In exceptional circumstances, a lender may make a late disbursement 61 - 90 days after a student drops below half-time status or after the period of enrollment for which the loan was intended. Within this additional 30-day period (between the 61st and up through the 90th day), a lender may presume that exceptional circumstances exist and make the disbursement. The school is responsible for determining the exceptional circumstances and for retaining documentation supporting the claim. This is stated in the December 1, 1995 FFEL Final Rule. SECTION 9: DEFAULT REDUCTION MEASURES Revisions to "exceptional mitigating circumstances" appeal As explained in the December 1, 1995 Student Assistance General Provisions Final Rule, for the first exceptional mitigating circumstance ("the school is successfully serving students from disadvantaged economic backgrounds"), there have been some changes to the criteria. For example, at least 70% (rather than 2/3rds) of a schools students enrolled at least half time must be from disadvantaged economic backgrounds. Please refer to this section for further information. As explained in the December 1, 1995 Student Assistance General Provisions Final Rule, the second possible mitigating circumstance serving as a grounds for appeal is that the school has a participation rate index of 0.0375 or less. This index is determined by "multiplying the institutions FFEL Program cohort default rate...by the percentage of the institutions regular students, as defined in 34 CFR 600.2, enrolled on at least a half-time basis who received a loan made under either the FFEL Program or the Direct Loan Program for a 12-month period that has ended during the six months immediately preceding the fiscal year for which the cohort of borrowers used to calculate the institutions rate is determined." (Please note that Direct Loan Program cohort default rates and weighted average cohort rates - combining both FFEL and Direct Loan borrower data - will not be calculated until 1997.) SECTION 10: COUNSELING STUDENTS No changes. SECTION 11: ADDITIONAL REQUIREMENTS AND RESPONSIBILITIES OF SCHOOLS Institutional refunds to students An April 1995 "Dear Colleague" letter (GEN-95-22) provides guidance concerning institutional refunds to students; it includes a discussion of reasonable administrative fees, accrediting agency refund policies, the definition of state refund policies, and the legal status of certain refund regulations. SSCR requirements Please note that a March 1996 "Dear President" memo (GEN-96-7) from the Departments National Student Loan Data System (NSLDS) Division stated that the Department has incorporated the SSCR into the NSLDS in order to centralize and fully automate the enrollment verification process. In April 1996, all schools should have received an electronic SSCR file from NSLDS via the Title IV Wide Area Network (TIV WAN). This file contains enrollment information on FFEL and Direct Loan Program borrowers that the Department believes are currently attending each school or who have recently left each school. Since NSLDS has taken over the SSCR process, guaranty agencies no longer will be sending SSCRs to schools; the agencies now receive enrollment verification directly from NSLDS. (The effective date for this change will be announced in a "Dear Colleague" letter scheduled to be disseminated during the fall of 1996.) Prohibited inducements A March 1995 DCL (95-G-278) provided guidance on prohibited inducements and on limitations on lending by schools. For example, if a school is serving as an eligible FFELP lender, it must not make any loan to an undergraduate student who has not previously obtained a loan from that school unless the borrower has been denied a loan by an eligible lender. For more information on this provision, please refer to 34 CFR 682.601(a)(4). GENERAL TOPIC SUMMARY OF EACH SECTION Section 1 of this chapter covers borrower eligibility criteria of particular interest to students with FFELs; more details on general eligibility requirements are provided in Chapter 2. Sections 2 through 5 cover the FFEL provisions, including a short section (Section 5) on loan consolidation and refinancing. Section 6 concentrates on elements common to the FFEL Programs and includes some program differences. Section 7 describes the loan application process step by step. Section 8 covers payment of loan proceeds. Section 9 focuses on default reduction measures, especially those requirements mandatory for schools with default rates above a given level. Section 10 covers loan counseling requirements and offers suggestions on presenting loan information to students. Finally, Section 11 covers school responsibilities and requirements that have not been addressed in previous sections. |