Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs - Payment to The Student

AwardYear: 1996-1997
EnterChapterNo: 10
EnterChapterTitle: Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs
SectionNumber: 8
SectionTitle: Payment to The Student
PageNumbers: 89-95


The lender disburses loan proceeds to the school for delivery to the
student. Loan proceeds may be credited to the student's account,
paid directly to the student, or a combination of both. The steps
required before payment is made to the student's account (or to the
student directly) are outlined below.

The lender must provide the borrower with a copy of the completed
promissory note and repayment information with the first
disbursement of loan proceeds. The lender must return the original
promissory note to the borrower when the loan is repaid in full.

Please note that in order to separate the functions of authorizing
payment and delivering loan proceeds, no single office at the school
is permitted to carry out both functions.

REQUIREMENTS FOR DISBURSEMENT

[[Financial aid transcript required for school(s) previously attended]]
If a student has received student financial aid while attending another
school, the financial aid administrator must request a financial aid
transcript from any eligible school previously attended before
releasing Federal Stafford Loan proceeds to the student. As
explained in Section 7, "The School's Portion," the financial aid
administrator may certify a borrower's loan application (except for
Federal PLUS) prior to receipt of a financial aid transcript.
Procedures for obtaining financial aid transcripts are described in
Chapter 3.

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 after the Secretary publishes a notice in
the Federal Register that NSLDS is available for this purpose.

Until the institution receives a FAT from each of a student's
previously attended schools, the institution may decline to certify the
student's FFEL or the parent's Federal PLUS application, and also
may not deliver Federal Stafford Loan proceeds to a student. This is
stated in the same Final Rule cited in the previous paragraph. Please
refer to Chapter 3, Section 4 (under "Requesting a Transcript") for
additional information. The section explains that a FAT is not
required in some cases -- for example, when the school the student
previously attended has closed.

A school may NOT release funds to the student if information
provided by any school he or she previously attended indicates that
the student is in default on a subsidized or unsubsidized Stafford
Loan, PLUS, SLS, Consolidation Loan, NDSL, or Perkins Loan--or
if that the student owes a repayment on a Pell, FSEOG, or SSIG
grant. See Chapter 2 for more information on grant overpayments.

However, a student who is in default may regain eligibility for
federal student financial aid if he or she repays the defaulted loan in
full or makes satisfactory repayment arrangements with the holder of
the loan. At least six consecutive monthly payments must be made
under such arrangements. This is stated in section 668.35, "Student
debts under the HEA and to the U.S.," in the December 1, 1995
Federal Regulatory Review Final Rule effective July 1, 1996.
(Criteria for regaining eligibility through consolidation of a defaulted
loan are somewhat different. Please refer to Section 5,
"Consolidation loan eligibility," for additional information.)

[[Reaffirmation of loan eligibility]]
The school must determine that the student has maintained eligibility
for the Stafford Loan before each disbursement of loan proceeds.
Reaffirmation of loan eligibility requires the school to verify Pell
Grant eligibility (if applicable), to establish that the student has
maintained satisfactory academic progress standards, and to verify
enrollment status. Generally, if the student drops below half-time
status after receiving the first disbursement of a loan, the student is
no longer eligible, and cannot receive the second loan disbursement.
However, as stated in section 682.604(b)(2)(iv), if a student resumes
enrollment on at least a half-time basis and the student continues to
qualify for the entire amount of the loan and these conditions are
documented in the student's file, then the school may transmit the
proceeds of the second or subsequent disbursements to the borrower.

[[Disbursement by EFT or master check]]
The money borrowed by the student under the Stafford Loan
Program must be sent by the lender to the school in the form of a
check or through electronic funds transfer (EFT) requiring
endorsement or other written certification by the student. The check
must be made payable to the student or (if required by the guaranty
agency) must be made copayable to the student and the school. A
student's loan proceeds may be disbursed via a master check; the
borrower's written authorization for the release of the funds is still
required. EFT and master check authorization are collected on the
common Stafford Loan application.

If Federal PLUS Loan proceeds are disbursed through EFT, the
school must obtain the parent borrower's authorization before
delivering the loan proceeds to the student. Authorization is collected
on the common PLUS Loan application. The parent's authorization
must be kept in the student's file.

The Higher Education Amendments of 1992 require PLUS loans first
disbursed on or after October 1, 1992 to be disbursed either to the
school through EFT, by master check, or by check made copayable
to the school and the parent borrower. The lender must provide the
school with the name and Social Security Number of the student for
whom the parent is borrowing. While copayable PLUS checks must
be disbursed to the school, the school is not required to endorse the
check before sending it to the parent borrower. However, the school
must verify the student's eligibility. The school has 45 days to verify
student eligibility and forward the check to the parent borrower. If
the parent is required to endorse the check and return it to the school,
the Department of Education recognizes that the school has no
control over how prompt the parent borrower may be in resubmitting
the endorsed check.

For a FFEL disbursed by EFT or by master check, a school may not
request the disbursement by the lender of the borrower's loan
proceeds until the 13th day before the first day of the student's
period of enrollment. For first-year, first-time borrowers,
disbursement by the lender may not be requested until the 24th day
of the student's period of enrollment.

If loan proceeds are disbursed by EFT or master check from the
lender to the school, the borrower's written authorization for release
of the initial and any subsequent disbursement must be obtained not
more than 30 days prior to the first day of classes of the enrollment
period. Written authorization is not required for disbursement if
authorization was provided in the loan application. The student and
parent are not required to provide authorization. This authorization
may be rescinded at any time by the student or parent. The
authorization is valid for that award year.

If a student is attending an eligible school located outside the United
States or is enrolled in a study-abroad program, the check may be
sent directly to the student or to the home school (if the student
provides a power-of-attorney to endorse the check or to complete an
EFT authorization).

Please note that disbursement and overaward time frames were
established in the December 1, 1994 General Provisions and FFEL
Final Rule. This regulation was developed to ensure comparability in
cash management procedures among all Title IV programs. Section
668.165 of the regulations explains disbursement methods for the
FFEL Program; section 682.604 covers school delivery of loan
proceeds to borrowers.

[[Multiple disbursement requirements]]
Multiple disbursement is required for most Stafford and PLUS Loan
proceeds regardless of the amount of the loan or the length of the
loan period. No installment amount may exceed more than half the
amount of the loan proceeds. A second or subsequent disbursement
must be made no earlier than 10 days before the first day of classes
of the period of enrollment for which the loan is intended. The date
of the second scheduled disbursement may be on the earlier of the
midpoint of the loan period for which the loan was made, or a date
which coincides with the beginning of the next scheduled term. Only
if the first disbursement would take place on or after the time
scheduled for the second disbursement can the proceeds be disbursed
by the lender in a single disbursement.

Please note that multiple disbursement requirements do not apply to
the Federal Consolidation Loan Program. These requirements also do
not apply to students attending an eligible school outside the United
States. However, students enrolled in a study-abroad program
through a U.S. institution are still subject to these requirements.

[[Disbursement schedule requirements]]
Schools are required to provide the lender with a schedule for
disbursement of loan proceeds for each student that meets Stafford
and PLUS Loan disbursement requirements. Lenders may not
disburse loan proceeds without first receiving a disbursement
schedule from the school. The student is not required to sign the
disbursement schedule. Remember, these are disbursement dates, not
anticipated delivery dates; the financial aid administrator should
allow time for mail delivery when establishing disbursement
schedules for lenders.

The disbursement schedule must comply with the multiple
disbursement requirements just described and with the 30-day
restriction on delivery to first-year, first-time undergraduate Stafford
Loan borrowers (see next page under "Restrictions on loan
delivery"). In developing a disbursement schedule, the financial aid
administrator must consider both the mandatory 30-day delayed
delivery requirement and the 45-day limit on holding loan proceeds,
and construct a schedule that will meet both of those requirements.

The disbursement schedule item on the school's portion of the
Stafford or PLUS Loan application may be used to fulfill the
requirement for a disbursement schedule. Or, the school may provide
disbursement schedules directly to the lender (or to the guaranty
agency, if the agency is serving as an agent for its lenders for this
purpose). The Higher Education Amendments of 1992 provide that
with the permission of the borrower, loan proceeds may be disbursed
on a weekly or monthly basis, as long as the disbursements are
substantially equal over the period of enrollment.

Schools with standard academic terms must develop disbursement
schedules based on their academic calendars unless charges are
assessed at established points in the program or academic year.
Schools WITHOUT standard academic terms must base their
disbursement schedules on the requirements for multiple
disbursement described in this section. For non-term schools, the
disbursement schedule should reflect the scheduled start date and
mid-point of the student's program. However, school delivery of the
second disbursement cannot take place until the actual midpoint--
when the student has earned the required credits or clock hours. This
may require the school to reschedule the second disbursement with
the lender.

[[Restrictions on loan delivery]]
As explained in section 668.165 of the June 30, 1995 Institutional
Eligibility Final Rule, the school may deliver FFEL proceeds to a
registered student either by paying the student directly or by
crediting his or her account no earlier than 10 days before the first
day of classes of the period of enrollment for which the loan is
intended. An exception to these general guidelines is the delayed
delivery restriction for first-year, first-time undergraduate Stafford
borrowers. For such a borrower, the school may not release funds
until 30 days after the first day of the student's classes. The delayed
delivery rule for first-year, first-time borrowers is not applicable to
PLUS loan borrowers.

[[NEW]]
A school must expeditiously provide written notification to a student
or parent, as applicable, that the school has credited the student's
account with FFEL Program funds. This is stated in the June 30,
1995 Institutional Eligibility Final Rule.

A school may not hold Stafford or PLUS Loan proceeds before
delivery to the student or parent or to the student's account for more
than 45 days after receiving them. If all required financial aid
transcripts have not been received by then, the school must
immediately return the loan proceeds to the lender. If for any reason
the loan check is returned uncashed to the lender, the portion of the
origination fee deducted from that disbursement should be returned
by the lender to the borrower. The lender must credit any refund of
tuition or other school charges to the borrower's loan principal.

If the school discovers that a student did not register for the period of
enrollment covered by the loan or did not begin delayed attendance
within the first 30 days of enrollment, the school must return the loan
proceeds to the lender within 30 days of this determination. If a
student registers, receives the loan proceeds, but never attends
classes for the period of enrollment covered by the loan, the student
has failed to qualify for the loan, and the lender must immediately
demand full loan repayment.

[[School administration of excess loan proceeds]]
In the case of excess loan proceeds, a school must pay the balance
directly to the student within 14 days of the date of the balance
occurred or the first day of classes of a payment period (whichever is
later). In the case of a PLUS Loan, the balance must be paid no later
than 45 days after the school's receipt of the funds.

Any additional loan proceeds in excess of those necessary to cover
allowable school charges owed by the student may be held by the
school (for use during the remainder of the academic year) ONLY
with the written authorization of the student. The excess proceeds
must be deposited in a separate account; the school may not mix
them with other funds or use them for any other purpose. If the
student, at a later date, requests the excess loan proceeds, the
financial aid administrator must release them.

The institution has certain responsibilities concerning its
administration of such accounts. For one, it must maintain cash in its
bank account for an amount equal to the amount of the funds the
school holds for the student. Also, the school must provide each
student for which it holds funds in subsidiary ledger accounts with an
annual notice. The notice must include an explanation of any interest
that the institution earns on the student's funds, and must explain
whether the institution will provide that student with the interest. The
school may retain any interest earned on the student's funds while
the school is holding those funds.

If a student completes the academic program and has Stafford Loan
funds remaining in his or her account, the school should either
promptly send the excess money to the student or return the
remaining funds to the lender and notify the student that the funds
have been returned. Any credit balance remaining in a student's
account after the student has dropped below half-time status,
withdrawn, or left school before completing the academic program
must either be given to the student or returned to the Student
Financial Assistance (SFA) Programs; this is also explained in
Chapter 3, "Refunds and Repayments." SFA funds can be paid to the
student only for noninstitutional educational costs incurred prior to
withdrawal; otherwise, these funds must be returned to the SFA
Programs. FFEL funds must be returned to the lender.

LATE DISBURSEMENT

If the lender disburses the loan proceeds after the end of the period of
enrollment for which the loan was made, the proceeds must be
returned to the lender within 30 days (unless the proceeds are the
first disbursement of the loan and come with a notice from the lender
stating that this represents a late first disbursement). Similarly, if the
lender disburses the loan proceeds before the end of the enrollment
period but after the student has left school or dropped below half-
time status, the school must return the loan proceeds to the lender
within 30 days unless this disbursement is a late disbursement.

Under FFEL Program regulations, a lender may disburse loan
proceeds after the student is no longer enrolled on at least a half-time
basis (known as a late disbursement)--if one of these circumstances
exists:

- the loan proceeds are used for costs of attendance incurred while
the student was enrolled at least half time;

- in the case of a first disbursement made to a first-year
undergraduate Stafford borrower, the student completed the first
30 days of the loan period for which the loan was made;

- in the case of a second or subsequent disbursement, the student
successfully completed the period of enrollment for which the loan
was made;

- the disbursement is received by the school within the earlier of 60
days after the date the student drops below half-time status or 60
days after the period of enrollment for which the loan was made.

Effective July 1, 1996, FFEL regulations provide that in exceptional
circumstances, a lender may make a late disbursement within 30
days after the period described in the last item above. 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 documenting
the exceptional circumstances in the student's file, or, if none exist,
then the school is responsible for returning the disbursement to the
lender.