| AwardYear: 1997-1998 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 3 SectionTitle: Payment to the Borrower PageNumbers: 33-44 The lender disburses loan proceeds to the school for delivery to the student or parent borrower. A school may credit loan proceeds to the student's account, pay the student or parent directly, or combine these methods. DEFINITIONS OF DELIVERY AND DISBURSEMENT A delivery of funds to the student occurs on the date the student's school account is credited by that school or on the date the borrower (student or parent) directly receives the Federal Family Education Loan (FFEL) funds from the school. If a school combines these methods of payment, delivery occurs on the earlier of the two dates. For a school that uses its own institutional funds to credit the student's school account or to pay the student before the FFEL funds are received from the lender, delivery occurs on the date that those institutional funds are credited to the student's account or paid directly to the borrower. Again, if a school combines these methods of payment, delivery occurs on the earlier of the two dates. If a school credits a student's account with institutional funds more than 10 days before the first day of classes, the delivery is considered to have occurred on the 10th day before the first day of classes. Similarly, if a school credits the account of a first-time, first-year, undergraduate borrower with institutional funds sooner than 30 days after classes start, the delivery is considered to have occurred on the 30th day after classes start. Disbursement of FFEL funds is made by a lender; delivery of those funds is made by a school. However, for the purposes of the cash management rules, disbursement is used to mean delivery. See Chapter 3 for more information on cash management. [[Separate office for authorizing and delivering]] Because the functions of authorizing payment and delivering loan proceeds must be separate, no single office at the school is permitted to carry out both functions. FINANCIAL AID HISTORY AND NSLDS As stated in Section 2, during the loan application process, a financial aid administrator must request a financial aid transcript (FAT) from each eligible school a student previously attended or must use the National Student Loan Data System (NSLDS) to obtain the student's previous financial aid information. It is the financial aid administrator's responsibility to determine whether a student previously attended an eligible school and to obtain the proper information. (Procedures for obtaining FATs are described in Chapter 3.) Until a school receives an FAT from each of a student's previously attended schools, the school may not deliver Federal Stafford Loan proceeds to a student. In the case of a Federal PLUS Loan, the financial aid administrator must not even certify the application until the school receives an FAT from each of the benefitting student's previous eligible schools. A school may NOT release funds to the student if information a previous school provided indicates that the student is in default on an Student Financial Assistance (SFA) loan or if that the student owes a repayment on an SFA grant. See Chapter 2 for information on these eligibility issues. METHODS OF DISBURSING AND DELIVERING LOAN FUNDS Disbursement to School Because authorization for a lender's disbursement by EFT or master check is collected on the common Stafford Loan and PLUS Loan applications, a school is not required to obtain a separate written authorization for the lender's disbursement in most cases. If a lender disburses Stafford Loan or PLUS Loan proceeds by EFT or master check and the borrower did not provide authorization on the application, the school must obtain the borrower's written authorization for the lender's disbursement of the initial and any subsequent disbursement. The school must collect this authorization not more than 30 days before the first day of classes of the enrollment period. With the first disbursement of loan proceeds, the lender must provide the borrower with a copy of the completed promissory note and repayment information. A school is also required to provide certain notifications to borrowers before delivering loan funds to them. See Chapter 3 of this handbook for more information on required authorizations and notifications. Chapter 3 also provides information on a borrower's right to cancel a loan or a portion of a loan before or soon after the time of disbursement. Delivery to Borrower A school may deliver FFEL funds directly by releasing the lender's check to the borrower (student or parent), by crediting the borrower's bank account via an electronic funds transfer (EFT), by issuing a check, or by paying the borrower in cash. Before delivering funds, a school must obtain the borrower's authorization to do so. The school must keep the authorization in the student's file. A check a school issues to a borrower must be made payable to the borrower and must be endorsed or certified by that borrower. (The school issues the check by releasing or mailing it to the borrower or by notifying the borrower that the check is available for immediate pickup.) A borrower receiving cash from a school must provide the school with a signed receipt when receiving the funds. DISBURSEMENT AND DELIVERY REQUIREMENTS The School's Role A school may not deliver the first FFEL installment to a first-time, first-year undergraduate until 30 days after the first day of the student's program of study. [[Check requiring borrowing endorsement]] In the case of a lender that disburses FFEL funds to a school by check requiring the endorsement of the borrower, a school may not request lender disbursement of the borrower's loan proceeds until the 30th day before the first day of classes for a payment period. [[First-year, first-time borrowers]] For first-year, first-time borrowers, a school may not request the first disbursement until the first day of classes of the first payment period. For any subsequent payment period, a school may not request a disbursement earlier than 30 days before the first day of classes. [[EFT or master check]] In the case of a lender that disburses FFEL funds to a school by EFT or master check, a school may not request lender disbursement of the borrower's loan proceeds until the 13th day before the first day of classes of a payment period. (This time frame applies to PLUS Loans as well.) [[First-year, first-time borrowers]] For first-year, first-time borrowers, a school may not request the first disbursement until the 27th day after the first day of classes of the first payment period. For any subsequent payment period, a school may not request a disbursement earlier than 13 days before the first day of classes. (Both time frames apply to PLUS Loans as well.) [[Resuming enrollment--34 CFR 682.604(b)(2)(iv)]] Before each disbursement is made, a school must review the student's eligibility to ensure that he or she remains eligible for the disbursement. If a student temporarily ceases to be enrolled at least half time before any FFEL funds are disbursed, the lender may still make a first disbursement (and subsequent disbursement) if the student resumes enrollment at least half time. The school must review the student's cost of attendance (COA) and revise it as necessary to ensure the student continues to qualify for the entire amount of the loan, even though the COA may be lower. The school must document this review in the student's file. 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. When the school reports the student's change in enrollment status, it must also request that the lender make the second or subsequent disbursements. Otherwise, the lender is required by law to cancel the second disbursement. The Lender's Role A lender must give a borrower a copy of an initial disclosure statement prior to, or at the time of, the first loan disbursement. This statement must indicate: - in bold print that this is a loan that must be repaid; - the principal amount of the loan; - the actual interest rate; - the amount of any charges, including the origination fee if applicable, and the insurance premium, to be collected by the lender before or at the time of each disbursement on the loan; - when repayment is required and when the borrower is required to pay the interest that accrues on the loan; - the name and address of the lender and the address to which communications and payments should be sent; - that the lender may sell or transfer the loan to another party and that the address and identity of the party to which correspondence and payments should be sent may change; - the yearly and cumulative maximum amounts that may be borrowed; - that information concerning the loan (including the amount of the loan and the date of disbursement) will be reported to a credit bureau; - the minimum annual payment required, and minimum and maximum repayment periods; - an estimate of the monthly payment due the lender, based on the borrower's cumulative outstanding debt (including the loan applied for); - refinancing and consolidation options; - that the borrower has the right to make prepayments; - circumstances under which repayment of principal or interest on the loan may be deferred and an explanation of forbearance; - that the U.S. Department of Defense offers a repayment option (as an enlistment incentive); - the definition of default (and the consequences of default); - the effect of the loan on eligibility for other student assistance; and - an explanation of borrower costs incurred in collection of the loan. The information on the disclosure statement must be the most up-to- date information concerning the loan and must reflect any changes in laws or federal regulations that may have occurred since the promissory note was signed. If the student has questions about the statement, he or she should contact the lender immediately. If the student wishes to cancel the loan, he or she should contact the school immediately. In either case, the student should NOT endorse a loan check or an EFT form authorizing transfer of loan proceeds to his or her account. [[Multiple disbursement requirements]] A lender must deliver loan proceeds in at least two installments. No installment may exceed one-half the loan amount. There are two exceptions to this multiple disbursement requirement: - A lender is not required to disburse a Federal Consolidation Loan in more than one payment. - A lender is not required to make more than one disbursement of any FFEL if the school the student is attending is not in a state. Chapter 3 discusses in detail the requirements of the cash management regulations published on November 29, 1996. The discussion here will focus on how those regulations affect FFEL disbursement procedures. [[Disbursement schedule requirements]] If a school's program uses standard academic terms (for example, semester, trimester, or quarter) and measures progress in credit hours, disbursements are made as follows: - If there is only one term, a lender disburses a FFEL in equal amounts at the beginning of the term and at the term's calendar midpoint. However, if any payment period has elapsed before a lender makes a disbursement, the lender may include in the disbursement the proceeds for all completed payment periods. Similarly, if a loan period equals one payment period and more than half of it has elapsed, a lender may include in a disbursement the proceeds for the entire payment period. - If there is more than one term, funds must be disbursed over all terms of the loan period. For example, if a loan period includes all three quarters of an academic year, the loan must be disbursed in three basically equal payments. Previously, quarter-based schools could have disbursed loan funds for all three quarters in two disbursements. If a school's program measures progress in clock hours or in credit hours without using standard terms, disbursements are made as follows: - If the program is one academic year or shorter, a lender disburses a FFEL in equal amounts at the beginning of the term and at the term's calendar midpoint. The second disbursement may not be made, however, until the later of - the calendar midpoint between the first and last scheduled days of class of the loan period, or - the date (determined by the school) that the student has completed half of the academic coursework (for credit hour schools) or half the clock hours (for clock hour schools) in the loan period. - If the program is longer than an academic year, the lender makes disbursements as described above for the first and any subsequent full academic year. If the remaining portion of the program is less than a full academic year, the lender disburses a FFEL in equal amounts at the beginning of the remaining portion and at the portion's calendar midpoint. Again, the second disbursement may not be made until the later of the two dates described above. OVERAWARDS If an overaward is identified after a school has received Stafford Loan proceeds but before the school has delivered the proceeds to the student, the school may attempt to reduce or eliminate the overaward by changing the function of an unsubsidized loan (an unsubsidized Stafford Loan, a nonfederal loan, or the parents' PLUS Loan) from covering need to replacing the EFC. If the school can eliminate the overaward by reducing or canceling subsequent disbursements of the loan, the school may do so and deliver the first disbursement to the student. The school must inform the lender of the reduced award and request cancellation or reduction of subsequent disbursements. Prior to the delivery of loan proceeds to the student, if the student is determined to be ineligible for the entire loan disbursement and if the overaward cannot be reduced or eliminated, the school must return the loan proceeds to the lender. The lender must credit to the borrower's account the portion of the insurance premium and origination fee attributable to the amount returned. If the student is ineligible for only a part of the disbursement, the school has two options: 1) The school may return the loan proceeds to the lender and request a new check for the correct amount. If the school chooses this option and asks for a new disbursement, the student will pay only for the reduced insurance premium and origination fee (if applicable) attributable to the reduced loan amount. 2) The school may have the student endorse the loan check or, in the case of a loan disbursed by electronic funds transfer (EFT), obtain the student's authorization to release loan funds. The school may then credit the student's account for the amount for which the student is eligible and promptly refund to the lender the portion of the disbursement for the which the student is ineligible. THE SCHOOL, NOT THE STUDENT, MUST RETURN ANY EXCESS LOAN PROCEEDS. The following example shows possible resolutions for an overaward: Bailey's subsidized Stafford Loan was certified for $2,000 ($1,000 for each semester of the school year). She received a $500 scholarship after the school received the first $1,000 disbursement. Bailey's need for the loan period is now $1,500. Her school could - return the loan proceeds to the lender and ask for a revised loan amount of $1,500 in two $750 installments; - deliver $750 of the first disbursement to Bailey, return $250 to the lender, and request that the lender reduce the second disbursement by $250 in order to disburse the revised loan amount in two equal installments; or - deliver $500 of the first disbursement to Bailey and return the remaining $500 to the lender to eliminate the entire overaward in the first disbursement. The second disbursement would be $1,000. When an award in excess of need is identified AFTER the school has delivered all Stafford Loan proceeds to the student, an overaward does not exist, and a refund to the lender is not required. These instructions for handling overawards do not have to be applied to Stafford Loans made to cover the COA at a school outside the United States or to PLUS Loans. CREDIT BALANCES A school must pay a credit balance directly to a student or parent - no later than 14 days after the balance occurred if the credit balance occurred after the first day of class of a payment period or - no later than 14 days after the first day of class of a payment period if the credit balance occurred on or before the first day of class of that payment period. Note that this 14-day requirement is now a standard for all SFA programs. A school may hold any additional loan proceeds in excess of those necessary to cover allowable school charges the student owes (for use during the remainder of the academic year) ONLY with the student's written authorization. A school may not require or coerce a student to provide authorization, and a school must allow for cancellation or modification at any time. [[Deposit of credit balances--34 CFR 668.165(b)]] The credit balance must be deposited in a subsidiary ledger account; also, the school must maintain cash in its bank account for an amount equal to the amount of the funds the school holds for the student. A school must pay any remaining balance on loan funds by the end of the loan period in the award year for which the funds were awarded. In the case of a PLUS Loan, a school must obtain the parent borrower's written authorization to deliver a credit balance of PLUS funds directly to the student. Otherwise, the school must deliver these funds to the parent. LATE DISBURSEMENT If the lender disburses the Stafford Loan or PLUS 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 make a late disbursement (that is, disburse loan proceeds after the student is no longer enrolled on at least a half-time basis) of a Stafford Loan or PLUS Loan only if the student became ineligible solely due to his or her change in enrollment status. A school may disburse late funds (Stafford or PLUS) only if the school certified the loan application before the student dropped below half-time enrollment AND the loan funds will be used to pay educational costs that the school determines the student incurred for the period in which he or she was enrolled and eligible. If the student is a first-year, first-time borrower, he or she must also have completed the first 30 days of his or her program of study to receive a late disbursement of a Stafford Loan or to benefit from the late disbursement of a PLUS Loan. A school may make a late disbursement of a Stafford Loan or PLUS Loan no later than 90 days after the date that the borrower became ineligible for the loan. A school may not make a late second or subsequent disbursement of a Stafford Loan unless the student has graduated or successfully completed the period of enrollment for which the loan was intended. BORROWER INELIGIBILITY AND RETURN OF FUNDS TO LENDER 10-Day Periods The regulations provide for three discrete 10-day periods for disbursing and returning FFEL Program funds. For purposes of the cash management regulations and this discussion, returning funds "promptly" means that a school may not delay initiating and completing its normal process for returning FFEL Program funds to lenders. Also for these purposes, the requirement that a school "return funds no later than 10 business days" means that a school must mail a check or initiate an EFT of FFEL funds to the lender by the close of business of the last day of the return period. Initial Period For FFEL Program funds a school receives from a lender via EFT or master check, a school must disburse those funds to eligible students (or, for PLUS Loan funds, to parents of eligible students) no later than 10 business days after the school receives the funds. For FFEL Program funds that a school receives from a lender via a check requiring the endorsement of the student (or parent), the school must disburse those funds to eligible students (or, for PLUS Loan funds, to parents of eligible students) no later than 30 calendar days after the school receives the funds. Conditional Period A school has 10 business days after the last day of the initial period to disburse FFEL Program funds only if - the student did not satisfy a programmatic requirement necessary to receive the funds during the initial period AND - the school expects the student to satisfy that requirement during the conditional period. Return Period For FFEL Program funds that a school does not disburse by the end of the initial or conditional period, as applicable, the school must return those funds to the lender promptly but no later than 10 business days from the last day of that initial or conditional period. However, if a student becomes eligible to receive FFEL program funds during the return period, the school may disburse those funds provided that the disbursement is made on or before the last day of the return period. Student's Failure to Register, Begin Delayed Attendance, or Complete Verification If a 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 and receives the loan proceeds but attends less than half time or is otherwise found to be ineligible for all or part of the loan, the student has failed to qualify for the loan, and the lender must immediately demand full loan repayment. It is the borrower's responsibility to notify the lender if he or she fails to enroll at least half time after receiving the loan. (The school must also notify the lender of the borrower's loan ineligibility.) It is also the borrower's responsibility to repay the amount due if he or she fails to qualify for it. IF THE BORROWER FAILS TO REPAY THE LOAN, THE LENDER, AFTER FOLLOWING DUE DILIGENCE REQUIREMENTS (WHICH INCLUDE DEMANDING PAYMENT IN FULL), MAY FILE A DEFAULT CLAIM FOR THE FULL LOAN AMOUNT. A school must return Stafford Loan proceeds to the lender if a student selected for verification does not complete the verification process within 45 days of the school's receipt of the proceeds. See The Verification Guide, 1996-97 for more information on verification. Effect of Returned Funds on Loan Fees If a school returns a disbursement or any portion of a disbursement to the lender, the origination fee and insurance premium are reduced in proportion to the amount returned. If a student returns a disbursement or any portion of a disbursement to the lender, the origination fee and insurance premium are reduced in proportion to the amount returned ONLY IF THE LENDER RECEIVES THE RETURNED AMOUNT WITHIN 120 DAYS AFTER DISBURSEMENT. REIMBURSEMENT PAYMENT METHOD A school placed under the reimbursement payment method (for the Federal Pell Grant Program, Direct Loan Program, or campus-based programs) may not disburse FFEL Program funds to a borrower until the Department approves a request from the school to make a disbursement for that borrower. If prohibited by the Department, a school may not certify a borrower's loan application until the Department approves a request from the school to make the certification for the borrower. For the Department to approve a school's disbursement or certification request, the school must submit documentation verifying each borrower's eligibility for disbursement or certification. (A school participating only in the FFEL Program may also be subject to this requirement if the Department deems the requirement necessary.) |