AwardYear: 1996-1997 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs SectionNumber: 4 SectionTitle: Federal Plus Loans PageNumbers: 37-43 As explained in Section 3, the Omnibus Budget Reconciliation Act of 1993 eliminated the Supplemental Loans for Students (SLS) Program (formerly covered in this section). Effective for periods of enrollment beginning on or after July 1, 1994, the SLS Program was merged into the unsubsidized Stafford Loan Program. SLS loans will be mentioned in this section only as they affect PLUS Loan procedures. For details on SLS loans made before July 1, 1994, please refer to Chapter 10, Section 4 of The Federal Student Financial Aid Handbook, 1993-94. Forbearance, cancellation, default, and other provisions common to all FFEL Programs, as well as to the Federal PLUS Program, are covered in Section 6. LOAN LIMITS [[NEW]] Federal PLUS Loans are limited to parent borrowers. A parent, as defined in the General Provisions regulations (Section 668.2) is a persons natural or adoptive mother or father, or legal guardian. As explained in the December 1, 1995 Federal Regulatory Review Final Rule effective July 1, 1996, the definition of a parent also includes 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. Please note that a PLUS Loan may not exceed the students estimated cost of attendance (COA) minus other financial aid awarded during the period of enrollment. As mentioned under "Borrower eligibility" in Section 1, as of July 1, 1995 a parent with an adverse credit history who is ineligible for a PLUS Loan may still receive a loan by securing an endorser who does not have an adverse credit history. The provision that enables a parent with an adverse credit history to secure an endorser without adverse credit was published November 29, 1994. [[Adverse credit history provisions for PLUS borrowers]] Regulatory criteria for determining adverse credit history have been established by the Department. Definition of adverse credit history was provided in a final regulation published June 28, 1994. The following text is taken directly from section 682.201 of the regulations. Unless the lender determines that extenuating circumstances existed, the lender must consider each applicant to have an adverse credit history based on the credit report if - the applicant is considered 90 or more days delinquent on the repayment of a debt; - the applicant has 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. A lender may establish more restrictive credit standards to determine whether the applicant has an adverse credit history. The absence of a credit history is not an indication that the applicant has an adverse credit history. [[NEW]] 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." [[Unsubsidized Stafford may be permitted after PLUS denial]] As mentioned previously, circumstances such as an adverse credit history prohibit a dependent undergraduate students parents from borrowing a PLUS. However, a dependent undergraduate student whose parent is unable to borrow under PLUS is allowed the loan limits applicable to an independent student under the unsubsidized Stafford Loan Program. The financial aid administrator must put in writing the reason the parent is unable to borrow a PLUS, provide supporting documentation (such as a letter of denial of a PLUS loan from a lender), and keep the information in the students file. INTEREST RATES [[PLUS interest rates are variable; adjusted each year]] PLUS Loans for which the first disbursement was made on or after July 1, 1987 through September 30, 1992 have a VARIABLE interest rate, to be determined on June 1 of each year according to a prescribed formula. The rate is effective July 1 through June 30. The interest rate for PLUS loans from the first period mentioned must not exceed 12%, and the interest rate for PLUS loans for the period from July 1, 1993 through June 30, 1994 was 6.79%. From July 1, 1994 through June 30, 1995, the rate was 8.53%. From July 1, 1995 through June 30, 1996, the rate is 9.13%. PLUS loans first disbursed on or after October 1, 1992 through June 30, 1994 also have a variable interest rate, determined on June 1 each year. However, the interest rate for these loans may not exceed 10%. The variable interest rate for these PLUS loans for the period from July 1, 1993 through June 30, 1994 was 6.64%. From July 1, 1994 through June 30, 1995, the rate was 8.38%. From July 1, 1995 through June 30, 1996, the rate is 8.98%. The variable interest rate for a PLUS loan disbursed on or after July 1, 1994 but prior to July 1, 1998 must not exceed 9%. The rate is determined on June 1 of each year and is effective for the following July 1 through June 30. The bond equivalent rate of the 52-week Treasury Bills (auctioned at the final auction held prior to June 1 each year), plus 3.1% of that amount, equals the variable interest rate. For the period July 1, 1994 through June 30, 1995, the rate was 8.38%. For the period July 1, 1995 through June 30, 1996, the rate is 8.98%. Parents with PLUS loans should understand that annual adjustments in interest rates may alter monthly payment amounts. Or, the lender may keep the monthly payment amount the same but increase (or decrease) the number of payments required to reflect the increase (or decrease) in the annual variable interest rate. [[No interest subsidy for PLUS]] There is no interest subsidy for PLUS borrowers; the borrower is responsible for all interest that accrues on the loan while the student is in school and during periods of deferment, according to the terms of the repayment schedule. ADDITIONAL COSTS OF BORROWING The maximum insurance premium that a guaranty agency may charge the lender of a PLUS is a one-time fee not to exceed 1% of the principal amount of the loan. (Formerly, a guaranty agency could charge a lender a fee not to exceed 3% of the loan principal.) If the lender passes this charge on to the borrower, the fee must be deducted proportionately from each loan disbursement. For loans first disbursed on or after July 1, 1994 for periods of enrollment beginning on or after that date, the origination fee on a PLUS was reduced from 5% to 3% of the loan principal. Lenders must deduct (or collect) the origination fee proportionately from each loan disbursement. REPAYMENT The repayment period for PLUS loan borrowers begins on the date the last disbursement is made. More information on PLUS loan disbursement is found under "Requirements for Disbursement" in Section 8. The repayment period for PLUS borrowers ends no later than 10 years after repayment begins, excluding periods of deferment or forbearance. [[PLUS loans must be multiply disbursed]] For PLUS borrowers, the first payment of interest and principal is due within 60 days after the loan is fully disbursed unless one of the deferment conditions described below applies. [[Capitalization of interest during deferment]] DEFERMENT OF PLUS LOANS IS FOR PRINCIPAL ONLY. The borrower must pay all interest that accrues on the loan after disbursement according to the terms of the repayment schedule (sent to the borrower when repayment begins). However, a lender may agree to capitalize the interest (add it to loan principal) when repayment of the principal begins or resumes. (See the explanation of capitalization in Section 6.) Interest that accrues during a deferment may be capitalized no more frequently than quarterly. Procedures for capitalization of interest under different deferments may vary. The borrower should be instructed to read his or her promissory note and check with the lender or guaranty agency for details on capitalization of interest. If a borrower agrees to pay interest during deferment but fails to do so, the borrower will be considered delinquent. The minimum annual payment on a PLUS loan is $600 (the combined total of $600 is the required minimum on all the borrowers FFEL loans if the borrower is also a student borrower). There is no prepayment penalty for PLUS loans. Lenders may agree to a standard, graduated, or an income-sensitive repayment schedule for PLUS loans, as long as minimum annual payment and maximum time periods for loan repayment are met. The Department encourages lenders to provide borrowers flexible repayment schedules as long as payments at least cover interest charges. If a graduated repayment schedule is established, however, no single payment can be more than three times greater than any other payment. Section 682.209(a)(6) of the FFEL regulations provides lenders with guidance on implementing the standard, graduated, and income- sensitive repayment plans. Please refer to pages 10-27 to 10-28 of Section 2 for additional information. If, after obtaining a PLUS, the student for whom the parent borrowed enrolls less than half time or does not enroll at all during the period for which the loan was intended, the entire amount is immediately due to the lender. It is the parents responsibility to notify the lender of the date on which his or her child (for whom the parent has taken out a PLUS Loan) ceases to be enrolled at a participating school at least half time. The school also must promptly inform the lender when the student for whom the parent borrowed drops below half- time status. (See the information on establishing a withdrawal date under "Repayment" in Section 2.) DEFERMENT PLUS Loan borrowers may postpone loan repayment under certain conditions, but as mentioned earlier, the borrower must pay the interest on PLUS Loans during a deferment period. The borrower must request a deferment either verbally or (more often) on a form provided by the lender. Because the repayment period on a PLUS begins on the date of last disbursement, a deferment covering such a loan would also begin on the date of the last loan disbursement. A PLUS loan application certified by the school may be considered by a lender as a request for deferment of principal while the student for whom the parent borrowed is in school--as long as the borrower requests a deferment by checking the appropriate box on the application. The following deferment provisions apply to PLUS Loan borrowers with outstanding loans disbursed before July 1, 1993, as well as to FFEL borrowers with outstanding loans disbursed on or after July 1, 1993: - Full-time study by the parent borrower at an eligible school. (See Section 2 under "Deferment" for the definition of an eligible school for the purpose of these deferments). - Study by the parent borrower in an eligible graduate fellowship program, including a recognized graduate international fellowship program at a foreign university. - Study by the parent borrower in a rehabilitation training program for disabled individuals. - Up to three years during which the parent borrower is temporarily totally disabled or during which the parent borrower is unable to work because he or she is caring for a spouse or other dependent who is temporarily totally disabled. - Periods of unemployment totaling up to two years (if the parent borrower is seeking but unable to find full-time employment during those periods). - Or full-time study by a dependent student for whom the parent borrowed a PLUS Loan (as long as the student is still dependent and meets the conditions for an in-school deferment). Such conditions follow: - The student must attend an eligible school. Deferment is also permitted for a dependent students half-time study if the student is a new borrower and obtains a Stafford Loan for the same enrollment period. - The student must attend an institution of higher education or a vocational school which is operated by an agency of the federal government. - Or the student must enroll in an eligible graduate fellowship program or in an approved rehabilitation training program for the disabled. An additional PLUS Loan deferment provision applies only to new borrowers who, on the date the promissory note is signed, has no outstanding balance on a FFEL (made before July 1, 1987) for a period of enrollment beginning before July 1, 1987: this is a deferment authorized for periods when the parent borrower is in school at least half time (as long as the parent borrower has obtained a subsidized or unsubsidized Stafford Loan for the same enrollment period). The following deferments apply to the FFEL borrower who is a new borrower (that is, a borrower with no outstanding balance on any FFEL) on the date the loan is applied for, and whose first loan disbursement is made on or after July 1, 1993. To qualify, the borrower must meet one of the following conditions. - at-least-half-time study at an eligible school; - study in an eligible graduate fellowship program (including study- abroad programs); - study in an approved rehabilitation training program for the disabled; - up to three years during periods in which the borrower is seeking but is unable to find full-time employment; - up to three years during periods of economic hardship (as determined by the lender). Economic hardship exists when the borrower is receiving payment under a federal or state public assistance program or is working full time and is earning a total monthly gross income that does not exceed the greater of: a) the minimum wage or b) the poverty line for a family of two, as determined in Section 673(2) of the Community Service Block Grant Act. The borrower may instead qualify for an economic hardship deferment based on other criteria. Specifically, the borrower may qualify if he or she is working full time and has a federal education debt burden (including any defaulted loan) that is at least 20% of the borrowers total monthly gross income. This income is based on full- or part- time employment and revenue received from all other sources. The borrowers income, minus the education debt burden, must be less than 220% of the total monthly gross amount associated with minimum-wage-rate work or associated with earnings equal to 100% of the poverty line for a family of two. In addition, a borrower may receive an economic hardship deferment under FFEL if the borrower has been granted an economic hardship deferment under either the Federal Direct Loan Program or the Federal Perkins Loan Program for the same period of time for which the FFEL economic hardship deferment is requested. Other criteria for this deferment are described in section 682.210(s)(6) of the FFEL program regulations. |