EnterChapterTitle: William D. Ford Federal Direct Loan Program
SectionTitle: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans
This section compares the terms and conditions of Direct Subsidized
Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
[[34 CFR 685.200(b)(1)(vii)]]
A borrower's credit history does not affect his or her eligibility to
borrow Direct Subsidized and Unsubsidized Loans. For Direct PLUS
Loans, credit history is a factor: A parent with an adverse credit
history is not eligible for a Direct PLUS Loan unless the parent
meets additional criteria, discussed below.
The Loan Origination Center obtains a credit report for every Direct
PLUS Loan applicant. An applicant is considered to have an adverse
credit history if he or she
- is delinquent in repaying any debt by 90 days or more;
- has, during the five years preceding the credit report's date, been
determined to be in default on a debt; has had his or her debts
discharged in bankruptcy; or has been the subject of foreclosure,
repossession, tax lien, wage garnishment, or write-off of an SFA
The absence of a credit history is not considered to be an adverse
credit history. That is, a parent cannot be rejected for a Direct PLUS
Loan because he she has no credit history.
[[Endorser and extenuating circumstances]]
A parent may still be able to receive a Direct PLUS Loan by
obtaining an endorser with no adverse credit history. (The endorser
may not be the student for whom the parent is borrowing.)
Alternatively, a parent may appeal a determination of adverse credit
history to the Department by documenting extenuating
circumstances. If the Department is satisfied such circumstances
exist, the parent is allowed to borrow a Direct PLUS Loan.
[[Direct PLUS Loans]]
Direct PLUS Loans do not have finite annual and aggregate loan
limits, as do Direct Subsidized and Unsubsidized Loans (see below).
A parent may borrow any amount up to the dependent student's cost
of attendance (COA) minus other estimated financial assistance for
that student (COA - EFA = Direct PLUS Loan limit).
[[Direct Subsidized and Unsubsidized Loans]]
Loan limits for Direct Subsidized and Unsubsidized Loans and
subsidized and unsubsidized Federal Stafford Loans are the same.
The chart below shows the maximum amounts a student may borrow
in a combination of Direct Subsidized and Unsubsidized Loans.
Direct Loan Program borrowing limits always include the amounts a
student has outstanding in subsidized and unsubsidized loans
UNDER BOTH THE DIRECT LOAN AND FFEL PROGRAMS,
even if the student has consolidated any of these loans. If the
borrowing limits have been met, the loans must be repaid in full or in
part before a student may apply again for Direct Subsidized or
Unsubsidized Loans. Federal and Direct PLUS Loans are not
included when assessing outstanding subsidized and unsubsidized
[[The chart "Direct Subsidized and Unsubsidized Combined Annual
and Aggregate Loan Limits" on page 11-12 is currently unavailable
for viewing. Please reference your paper document for additional information.]]
[[The chart "Direct Loan Program: Undergraduate Annual Loan
Limits" on page 11-13 is currently unavailable for viewing. Please reference
your paper document for additional information.]]
[[Dependent undergraduate students]]
A dependent undergraduate student who has not yet successfully
completed his or her first year of study may borrow combined
subsidized and unsubsidized loans not to exceed an annual total of
- $2,625 for a program of study at least an academic year in length;
- $1,750 for a program of study at least two-thirds of an academic
year but less than a full academic year in length; and
- $875 for a program of study at least one-third but less than two-
thirds of an academic year in length.
Note: Students may not receive Direct Loans for programs that are
less than one-third of an academic year.
A dependent undergraduate student who has successfully completed
his or her first year of study but not the second year may borrow up
to $3,500 in combined subsidized and unsubsidized loans for a
period of at least an academic year in length. If the remaining portion
of the program is less than an academic year, the loan must be
prorated. (See page 11-17 for a discussion of proration.)
For a dependent undergraduate student who has successfully
completed his or her first and second year of study but not the
remainder of the program, the combined subsidized and unsubsidized
loan limit is $5,500 for a period of at least an academic year in
length. If the remaining portion of the program is less than an
academic year, the loan must be prorated.
The maximum aggregate amount dependent undergraduates may
borrow in a combination of subsidized and unsubsidized loans is
Independent students are eligible for higher annual and aggregate
limits in Direct Unsubsidized Loans, as the chart on the previous
[[Independent undergraduate students]]
An independent undergraduate student who has not yet successfully
completed his or her first and second year of study may borrow
additional amounts of Direct Unsubsidized Loans not to exceed
- $4,000 for a program of study (or remaining portion of a program)
that is at least an academic year in length;
- $2,500 for a program of study (or remaining portion of a program)
that is at least two-thirds but less than a full academic year in
- $1,500 for a program of study (or remaining portion of a program)
that is at least one-third but less than two-thirds of an academic
year in length.
As mentioned earlier, students may not receive Direct Loans for
programs that are less than one-third of an academic year.
An independent undergraduate student who has successfully
completed his or her first and second year of study but not the
remainder of the program may borrow additional amounts of Direct
Unsubsidized Loans not to exceed $5,000 for a period of at least an
academic year in length. If the remaining portion of the program is
less than an academic year, the loan must be prorated (see page 11-
The maximum aggregate amount an independent undergraduate may
borrow in Direct Subsidized and Unsubsidized Loans is $46,000.
However, no more than $23,000 of this amount may be in subsidized
loans. Remember that the aggregate limit includes amounts borrowed
under the Federal Stafford Loan program.
[[Dependent student eligibility for higher limits--
34 CFR 685.203(c)]]
Dependent students may be eligible for the same annual and
aggregate loan limits as independent undergraduate students if it is
likely a parent will be precluded from borrowing Direct PLUS Loans
and is otherwise unable to provide the EFC. The school must receive
documentation of exceptional circumstances showing why a parent
cannot borrow. Such circumstances include an adverse credit history
or situations where the parent's whereabouts are unknown, the parent
is incarcerated, or the parent receives only public assistance or
Financial aid administrators must review the family's financial status
and consider their students' indebtedness before permitting them to
borrow under higher Direct Unsubsidized Loan limits. Aid
administrators also must put in writing the reason the parent cannot
obtain a Direct PLUS Loan and keep supporting documentation in
the student's file.
Graduate students may borrow up to $18,500 annually in a
combination of subsidized and unsubsidized loans under both the
Direct Loan and Federal Stafford Loan programs. No more than
$8,500 may be in subsidized loans. Loans for graduate students are
not subject to proration. The maximum aggregate amount, which
includes both undergraduate and graduate borrowing, is $138,500.
No more than $65,500 of this amount may be in subsidized loans.
[[Frequency for annual loan limits]]
Annual Direct Loan limits are restricted by the time period to which
they apply. That is, to be eligible to receive a subsequent loan, a
borrower must meet certain calendar time or academic progress
standards. For more information, see the appendix at the end of this
[[Determining academic year level]]
A student's academic year level for loan limit purposes is set
according to the school's standards for the time normally required to
complete a given program. For example, if the school determines a
program normally can be completed in two years of full-time study,
a student in that program can never receive more than the second-
year annual loan limit of $3,500 in any given year, no matter how
long it takes the student to finish. Further, in a program of
undergraduate study, the number of years a student has completed
includes any prior enrollment in an eligible program of
undergraduate education for which the student was awarded an
associate or bachelor's degree--if the school requires the degree for
admission to the program in which the student is currently enrolled at
Students enrolled in teacher certification or recertification programs
are considered as fifth-year undergraduate students when
determining annual loan limits and may borrow up to $5,500 a year,
subject to reductions for programs less than an academic year in
Students enrolled in coursework for a single period up to 12
consecutive months to prepare for an undergraduate program may
borrow at the loan level determined for first-year undergraduates.
Students taking preparatory coursework required to enter graduate or
professional programs may borrow up to the $5,500 annual loan
limit for third-, fourth-, or fifth-year undergraduates.
[[Exceeding loan limits]]
Students who borrow more than the annual or aggregate loan limits
for which they are eligible under SFA loan programs will lose
eligibility for further aid from ANY SFA Program until the excess
amount is repaid in full or unless other arrangements are made. See
[[Health profession students' eligibility for higher unsubsidized
An increase in ANNUAL Direct Unsubsidized Loan limits is
permitted for students who could have borrowed under the Health
Education Assistance Loan (HEAL) Program but who are no longer
eligible because they did not borrow under that program before
October 1, 1995. Students in this category who are enrolled FULL
TIME in schools participating in the HEAL Program are eligible for
higher Direct Unsubsidized Loan amounts. Conversely, students who
remain eligible to borrow under HEAL (students who DID receive
HEALs before October 1, 1995) may NOT receive increased Direct
A school participating in HEAL is one that made HEAL
disbursements during Fiscal Year 1995 (October 1, 1994 through
September 30, 1995). Schools that have withdrawn from the HEAL
program--or have simply stopped making HEALs--after FY 95 may
originate Direct Loans at the increased limits for any loan period
beginning before July 1, 1998. At the time this Handbook was being
prepared, a planned Dear Colleague letter would cover these
When determining additional Direct Unsubsidized Loan limits,
participating HEAL schools must use the current HEAL Program
and Discipline loan limits, described in the Department of Health and
Human Services "Student Financial Aid Guidelines Notebook" in
Section 104.3.2. Note that, unlike in HEAL, no need analysis is
required for the extra Direct Unsubsidized Loan amounts.
AGGREGATE Direct Unsubsidized Loan limits still apply for health
profession students. Schools will be notified if these limits change.
PRORATED ANNUAL LOAN LIMITS--DIRECT SUBSIDIZED
AND UNSUBSIDIZED LOANS
[[Proration applies only to undergraduates]]
Generally, a dependent or independent undergraduate may borrow
up to the annual limit applicable to the student's year in school.
However, the maximum amount an undergraduate student may
borrow must be reduced, or PRORATED, in certain situations.
NOTE THAT DIRECT PLUS LOANS ARE NOT SUBJECT TO
Loans must be prorated when a student is enrolled
- in a program containing fewer weeks, clock hours, or credit hours
than the statutory minimum academic year; or
- in a program that is longer than an academic year, but the final
period of study is shorter than an academic year.*1*
There are two types of proration: FIXED and PROPORTIONAL.
- FIXED prorated loan limits are set dollar amounts based on the
length of a student's program (or final period of study) in relation
to a full academic year.
- PROPORTIONAL prorated loan limits are calculated amounts based on
the ratio of the credit or clock hours in a final period of study to
the credit or clock hours in the school's academic year.
[[Program less than AY--fixed proration]]
Schools use fixed proration when students are enrolled in programs
containing fewer weeks, clock hours, or credit hours than the
statutory minimum academic year. Chapter 3 contains extensive
information about academic year requirements. Briefly, an academic
year must contain AT LEAST 30 weeks of instructional time*2*
AND 24 semester or trimester hours, 36 quarter hours, or 900 clock
hours. To determine the length of a student's program in relation to a
full academic year, schools must compare two fractions: the number
of clock or credit hours in the program divided by the number of
hours in the academic year, and the number of weeks of instructional
time in the program divided by the number of weeks in the academic
year. The lesser of these fractions determines the relation of program
length to academic year length.
Fixed proration example
Hector, an independent student, has enrolled in a 650-clock
hour, 28-week program. The school defines the academic year for
the program as 900 clock hours and 30 weeks of instructional
time. Because Hector's program is shorter than an academic year,
his Direct Loans must be prorated. The school compares the two
[[The fractions on page 11-18 are currently unavailable for viewing.
Please reference your paper document for additional information]]
Of the two fractions, the smaller is 650/900 (.72); the school
uses .72 as the length of Hector's program when determining the
prorated loan amount. The program is less than a full year but
greater than 2/3 (.66) of an academic year. Therefore, Hector may
borrow up to $1,750 in combined Direct Subsidized and
Unsubsidized Loans (see the loan limits chart on page 11-13).
Because he is an independent student, he may be eligible for an
additional prorated Direct Unsubsidized Loan of up to $2,500.
[[Final period of study less than AY]]
Schools must prorate a student's loan if the final period of study is
shorter than an academic year. A final period of study is one at the
end of which a student will complete a program. At a TERM-
BASED CREDIT HOUR school (where the academic year is
measured in semesters, trimesters, quarters, or other terms), a final
period of study is considered shorter than an academic year if the
final period consists of fewer terms than the school's scheduled
academic year. At a TERM-BASED CLOCK HOUR school (where
the academic year is measured in semesters, trimesters, quarters, or
other terms), a final period of study is considered shorter than an
academic year if the final period consists of fewer terms than the
school's scheduled academic year OR fewer clock hours than the
minimum statutory requirements for a full academic year. Terms
within the same academic year as the student's final term are
considered part of the final period of study, even if separated from
the final term by a term in which the student is not enrolled.
Rousimoff College has an academic year that consists of three
quarters: fall, winter, and spring. Laurel will be enrolling in the
fall and spring quarters, but not the winter quarter, and will
graduate at the end of the spring quarter. Because the fall quarter
is in the same academic year as Laurel's final quarter, it is part of
the final period of study, even though there is a term between the
final quarter and the fall quarter in which Laurel will not enroll.
Because the fall quarter is part of the final period of study, the
loan Laurel receives in the fall must be prorated, just as her spring
loan must be prorated.
At a NONTERM school (where programs are measured only in clock
or credit hours), a final period of study is considered less than an
academic year if the final period consists of fewer clock or credit
hours than the minimum statutory requirements for a full academic
To prorate the loan for a program that exceeds an academic year but
has a final period of study less than a full academic year in length,
schools must calculate what proportion of a full academic year the
final period of study represents. The loan amount is then prorated on
Final period example
José is an independent third-year student at Van Dam College.
Van Dam has 36 quarter hours and three quarters. José needs to
complete only 24 quarter hours to finish his program and enrolls
in the fall and winter quarters. Because his final period of study (2
quarters) is less than an academic year (3 quarters), his Direct
Loans must be prorated. The school determines the proportion of
the academic year the final period of study represents by dividing
the credit hours in this period by the number in a full academic
24 quarter hours in final period
36 quarter hours in academic year
The school then multiplies the loan limit for all third-year students
($5,500) by 24/36 to determine the maximum Direct Subsidized
Loan José can receive:
24/36 X $5,500 = $3,667
José can receive up to $3,667 in combined Direct Subsidized and
Unsubsidized Loans. Because José is an independent student, he
may be eligible for an additional Direct Unsubsidized Loan. To
determine the amount, Van Dam multiplies the Unsubsidized limit
for independent students ($5,000) by 24/36:
24/36 X $5,000 = $3,333
José may be eligible for an additional prorated Direct
Unsubsidized Loan of up to $3,333.
In some cases, the school will use both fixed and proportional
proration to determine the loan amount for a final period of study.
See the example on the next page.
Mixed proration example
Laurel is an independent second-year student at Rousimoff
College. She has 16 quarter hours to complete in her program and
will enroll in the fall and spring quarters. Each quarter at
Rousimoff consists of 10 weeks of instructional time. Laurel will
graduate at the end of the spring quarter. Because this final period
of study is shorter than an academic year, Laurel's Direct Loans
must be prorated. Rousimoff determines the length of the final
period by dividing the number of quarter hours in the period by
the number of hours in the academic year:
16 quarter hours in final period
36 quarter hours in academic year
The school then multiplies the loan limit for all second-year
students ($3,500) by 16/36 to determine the maximum amount
Laurel can receive in combined Direct Subsidized and
16/36 X $3,500 = $1,556
Because Laurel is an independent student, she may be eligible for
an additional Direct Unsubsidized Loan. The school compares the
two fractions required for fixed proration:
[[The fractions on page 11-20 are currently unavailable for viewing.
Please reference your paper document for additional information.]]
Of the two fractions, the smaller is .44; the school uses .44 as the
length of Laurel's final period of study when determining the
prorated loan amount. The period is less than 2/3 of an academic
year (.66) but greater than 1/3 (.33). Therefore, Laurel may be
eligible for an additional prorated Direct Unsubsidized Loan of up
[[Enrollment status changes]]
If a student drops or adds a course after the school has originated a
prorated loan, the school MAY readjust the loan amount but is not
required to do so. Of course, a student who drops courses must still
be enrolled at least half time to be eligible for any loan amount.
The interest rates for Direct Subsidized and Unsubsidized Loans are
the same, but the Department does not charge interest to Direct
Subsidized Loan borrowers during the in-school, grace, and
deferment periods. Direct Unsubsidized Loan borrowers are
responsible for interest during all periods, including in-school, grace,
and deferment periods.
The Department also does not subsidize Direct PLUS Loans;
borrowers are responsible for all interest, including that which
accrues during the student's in-school period and during periods of
deferment for the parent.
ALL borrowers are charged interest during forbearance periods.
Interest rates are variable; legislation caps them at 8.25% for Direct
Subsidized and Unsubsidized Loans and at 9% for Direct PLUS
Loans. Interest rates are determined on June 1 each year and apply to
the following 12-month period from July 1 to June 30.
[[Subsidized and Unsubsidized Loans: two interest formulas]]
Currently, there are two formulas for calculating the variable interest
rate for Direct Subsidized and Unsubsidized Loans. For loans first
disbursed between July 1, 1995 and June 30, 1998 that are in in-
school, grace, or deferment periods, the interest rate equals the bond
equivalent rate of the 91-day Treasury bills auctioned at the final
auction before June 1, plus 2.5 percentage points. For loans first
disbursed between July 1, 1995 and June 30, 1998 that are NOT in in-
school, grace, or deferment periods, the interest rate equals the bond
equivalent rate of the 91-day Treasury bills auctioned at the final
auction before June 1, plus 3.1 percentage points. NOTE: THE
LATTER FORMULA ALSO APPLIES TO ANY DIRECT
SUBSIDIZED OR UNSUBSIDIZED LOAN FIRST DISBURSED
BEFORE JULY 1, 1995, IN ANY PERIOD.
Currently, the interest rate for Direct PLUS Loans equals the bond
equivalent rate of the 52-week Treasury bills auctioned at the final
auction before June 1, plus 3.1 percentage points.
[[Future change in interest rates]]
Beginning July 1, 1998, interest rate calculations change. For Direct
Subsidized and Unsubsidized Loans first disbursed on or after July 1,
1998, the interest rate will equal the bond equivalent rate of the
security with a comparable maturity, that the Department will
establish, plus 1 percentage point. The rate will still be determined
on June 1 each year and apply to the following 12-month period
from July 1 to June 30. The rate will not exceed 8.25 percent. THIS
INTEREST RATE CALCULATION APPLIES WHETHER OR
NOT A LOAN IS IN AN IN-SCHOOL, GRACE, OR DEFERMENT
PERIOD. The same calculation applies to Direct PLUS Loans first
disbursed on or after July 1, 1998, except the rate will equal the bond
equivalent rate of the security with a comparable maturity, that the
Department will establish, plus 2.1 percentage points. The rate will
not exceed 9 percent.
During certain periods, borrowers may choose to pay the interest for
which they are responsible:
- Direct Subsidized Loan borrowers may choose to pay interest as it
accrues during forbearance.
- Direct Unsubsidized Loan borrowers may choose to pay interest
as it accrues during in-school, grace, deferment, and forbearance
- Direct PLUS Loan borrowers may choose to pay interest as it
accrues during deferments or forbearance.
If borrowers choose not to make interest payments during applicable
periods, the interest is capitalized, that is, added to the borrower's
- Interest that accrues and is not paid on a Direct Subsidized loan
during forbearance is capitalized when that period ends.
- Interest that accrues and is not paid on a Direct Unsubsidized
Loan before the loan enters repayment is capitalized when the loan
- Interest that accrues and is not paid on a Direct Unsubsidized
Loan or Direct PLUS Loan during a period of deferment or
forbearance is capitalized when that period ends.
Accrued interest is capitalized annually for Direct Subsidized and
Unsubsidized Loans repaid under the Income Contingent Repayment
Plan (or under an alternative repayment plan) when the borrower's
payments are not high enough to cover the interest amounts that
accrue. The amount of interest that may be capitalized in such cases
is limited. (See page 11-24 for more information on repayment plans
and 11-28 for more information on ICR capitalization.)
The Department may capitalize unpaid interest on any Direct Loan
Capitalizing interest increases the loan's principal balance, the
interest that must be paid during repayment, and the total amount the
borrower will pay over the life of the loan.
ADDITIONAL BORROWING COSTS
The Department charges a loan fee of 4% of the principal for any
Direct Loan (except a Direct Consolidation Loan) and deducts this
fee from the loan proceeds. A prorated portion of the fee is deducted
from each disbursement. If the loan is canceled or the loan amount is
adjusted downward within 120 days of disbursement, the Department
cancels or reduces the loan fee attributable to the disbursement
portion repaid. A school that learns it should have canceled, but did
not cancel, a borrower's loan proceeds within 120 days of
disbursement should identify all affected loan records and report the
date the loan(s) should have been canceled. This action will ensure
that borrowers will not be charged loan fees for which they should
not be responsible.
The Department can require borrowers to pay a late charge of up to
six cents for each dollar of a required monthly payment (or portion
of a payment) not paid within 30 days after the due date.
CURRENTLY, THE DEPARTMENT IS NOT CHARGING LATE
On a Direct Loan NOT in default, the Department may require
borrowers or endorsers to pay any costs, in excess of routine
collection costs, incurred in collecting installments not paid when
due. Such charges do not include routine costs of preparing letters or
notices or making local or long-distance telephone calls. An example
of a non-routine collection cost is the cost of processing checks
returned for insufficient funds. On a Direct Loan in default, the
Department requires borrowers and any endorsers to pay additional
GRACE PERIODS--DIRECT SUBSIDIZED AND
A six-month grace period begins the day after a Direct Subsidized or
Unsubsidized Loan borrower ceases to be enrolled as at least a half-
time student at an eligible school. During the grace period, Direct
Subsidized Loan borrowers are not required to make payments on
loan principal and are not charged interest. Direct Unsubsidized Loan
borrowers are not required to make payments on loan principal but
are responsible for the interest that accrues.
A borrower who returns to school as at least a half-time student
before the grace period ends may again postpone loan repayment
while in school and will be entitled to a full grace period after
terminating enrollment or dropping below half-time status. Once a
borrower's grace period expires, he or she must request, and be
granted, a deferment or forbearance in order to postpone payments
on a Direct Subsidized or Unsubsidized Loan. (See "Deferment" on
page 11-29 and "Forbearance" on page 11-33.)
The grace period for a Direct Subsidized or Unsubsidized Loan
borrower enrolled in a correspondence program begins on the earliest
of the date
- the borrower completes the program,
- the borrower falls 60 days behind the due date for submitting a
scheduled assignment,*3* or
- that is 60 days following the latest allowable date the school
establishes for completing the program.
A Direct PLUS Loan borrower does not receive a grace period.
*1* Proration must also be done in certain cases where a program is
exactly one academic year long: For example, a student withdraws
from a one-year program and later, in a new academic year,
completes the program (either re-enrolling at the original school or
enrolling at another school). In this case, the student is enrolled in a
final period of study that is shorter than an academic year.
*2* The Department may waive this requirement for some programs
of fewer than 30 weeks.
*3* Schools have the authority to allow one restoration of in-school
status for borrowers who are 60 days late submitting a
correspondence assignment. The borrower is required to state in
writing, within the 60-day period, that he or she intends to continue
in the program. The written statement also must show the borrower
understands that required lessons must be submitted on time.
[[Direct Subsidized and Direct Unsubsidized Loans]]
The loan repayment period for Direct Subsidized Loans and Direct
Unsubsidized Loans begins the day after the grace period ends. At
that point, all borrowers become responsible for paying the principal
and interest. The first payment is due within 60 days of the start of
the repayment period.
[[Direct PLUS Loans]]
The repayment period for Direct PLUS Loans begins the day the
loan is FULLY disbursed. The first payment of principal and interest
is due within 60 days after the final loan disbursement.
All loan payments are applied in this order: (1) accrued charges and
collection costs, (2) outstanding interest, and (3) outstanding
Direct Subsidized and Unsubsidized Loan borrowers may repay their
loans through one of the following repayment plans:
- the Standard Repayment Plan,
- the Extended Repayment Plan,
- the Graduated Repayment Plan,
- the Income Contingent Repayment Plan, or
- an alternative repayment plan
Direct PLUS Loan borrowers may choose from any of these plans
except Income Contingent Repayment.
In general, a borrower's Direct Loans must be repaid under the same
repayment plan, except that a borrower may repay a Direct PLUS
Loan or Direct PLUS Consolidation Loan separately from other
Direct Loans. The 1997-98 Repayment Book explains repayment
plans in detail.
[[The chart "Direct Loan Program Repayment Plans" on page 11-25
is currently unavailable for viewing. Please reference your paper document
for additional information.]]
Shortly before a loan enters repayment, the borrower receives
information from the Department's Direct Loan Servicing Center
about the various repayment plans (including the estimated amounts
the borrower would pay under each plan) and a request that the
borrower select a plan. Borrowers who fail to choose are
automatically placed in the Standard Repayment Plan.
The time a borrower's loan is in repayment will vary depending on
the total amount owed and the repayment plan selected.
With Standard Repayment, borrowers make fixed payments of at
least $50 a month for up to 10 years. The Standard Repayment Plan
may result in the lowest amount of 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
a borrower pays over the life of the loan.
With Extended Repayment, borrowers make fixed payments of at
least $50 a month over a period ranging from generally 12 to 30
years, depending on the total amount borrowed.
For lower loan amounts, the repayment period may be less than 12
years because a borrower must make payments of at least $50 a
[[The chart "Extended/Graduated Repayment" on page 11-26 is
currently unavailable for viewing. Please reference
your paper document for additional information.]]
With Graduated Repayment, borrowers' payments start out low, then
increase every two years. The repayment period will vary from
generally 12 to 30 years, depending on the total amount borrowed.
Under Graduated Repayment, the minimum monthly payment is
either the interest that accumulates between payments or one-half the
payment a borrower would make using the Standard Repayment
Plan, whichever is larger. However, a borrower's monthly payment
will never increase to more than one-and-one-half times what the
borrower would pay under Standard Repayment. Generally, the
amount a borrower repays over the life of the loan will be higher
under Graduated Repayment than under Extended Repayment.
However, Graduated Repayment has the advantage of offering lower
monthly payments during the early portion of a borrower's career
when the borrower's income is likely to be lower.
[[Income Contingent Repayment]]
The Income Contingent Repayment (ICR) Plan allows Direct
Subsidized and Unsubsidized Loan borrowers to make monthly
payments based on annual income and the amount of outstanding
Direct Subsidized and Unsubsidized Loans. (As mentioned earlier,
ICR is not available to repay Direct PLUS Loans.)
To participate in the ICR Plan, a borrower (and, if married, the
borrower's spouse) must sign a form that permits the Internal
Revenue Service to inform the Department of certain tax return
information, such as adjusted gross income (AGI). Each year, the
Department uses the borrower's (and spouse's) information to
calculate the borrower's monthly payment.
In certain circumstances, the Department can require alternative
documentation of income from borrowers and, if married, their
spouses. In fact, the Department will require alternative
documentation from borrowers in their first year of repayment. This
documentation includes pay stubs, canceled checks or, if these are
unavailable, signed statements explaining the borrowers' income
sources. Borrowers also can submit alternative documentation to
request that their monthly payments be adjusted in special
circumstances--for example, if the borrower (or spouse) becomes
unemployed. See the 1997-98 Repayment Book for more
information on alternative documentation.
[[ICR repayment period]]
The maximum repayment period is 25 years. If the borrower has
made payments under the Standard Plan or the 12-year Extended
Plan and then switches to the ICR Plan, those earlier payment
periods are counted toward the 25-year repayment period. Earlier
payment periods in other plans do not count toward the 25-year
period. If the borrower has not repaid the loans after 25 years under
ICR, the unpaid portion is discharged (canceled); however, currently
the borrower must pay taxes on the discharged amount.
Monthly payments are recalculated annually. Borrowers pay the
- the amount that would have been paid if the borrower repaid the
loan in 12 years, multiplied by an income percentage factor that
varies with the borrower's annual income; or
- 20% of the borrower's discretionary income, which is the
borrower's AGI minus the poverty level for his or her family size;
the poverty level is determined by published U.S. Department of
Health and Human Services guidelines.
If income is less than or equal to the poverty level for the borrower's
family size, the monthly payment will be zero. If the calculated
monthly payment is greater than zero but less than $5, borrowers are
required to make a $5 monthly payment. If the monthly payment is
calculated as more than $5, borrowers must pay the actual calculated
[[ICR--capitalization of interest]]
As noted previously, if monthly payments under ICR do not cover
accruing interest, the unpaid interest is capitalized once each year. If
capitalization increases the outstanding principal the borrower owes
to 10% more than the original principal owed when the repayment
period began, interest will continue to accumulate but will not be
capitalized. The limit on the amount of interest capitalized under ICR
does not apply during any periods of forbearance or during periods
of deferment for Direct Unsubsidized Loans.
The Department can designate the ICR Plan for a borrower who
[[Alternative repayment plan]]
The Department may provide an alternative repayment plan if the
borrower can demonstrate satisfactorily that the other repayment
plans' terms and conditions are not adequate for his or her
exceptional circumstances. The Department may require evidence of
The repayment period under an alternative repayment plan may not
exceed 30 years from the date the Direct Loan enters repayment. The
maximum timeframe to repay does not include periods of deferment
or forbearance. The terms under which interest is capitalized are the
same as for the ICR Plan.
If a borrower is permitted to use an alternative repayment plan, the
Department notifies him or her in writing of the plan's terms. The
borrower has the option to accept the plan or choose another.
[[Switching repayment plans]]
A borrower who decides the repayment plan selected no longer
meets his or her needs can switch plans, as long as the new plan's
maximum repayment period is longer than the period the borrower's
loan has already been in repayment. The exception to this
requirement is that a borrower can switch to ICR at any time.
A borrower repaying a defaulted loan under ICR may not switch
plans unless he or she
- was required to make, and did make, a payment under ICR in each
of the preceding three months; or
- was not required to make payments but made three reasonable and
affordable payments in each of the preceding three months.
In either case, the borrower must submit a request to the Department
to switch plans, and the Department must approve the request.
If a borrower pays any amount that exceeds the amount due, the
excess is a prepayment. A Direct Loan borrower may prepay all or
part of a loan at any time without penalty. A prepayment is applied
first to any accrued charges or collection costs, then to any
outstanding interest, and then to outstanding principal. If the amount
of the prepayment EQUALS OR EXCEEDS the monthly repayment
amount under the borrower's repayment plan, the Department
advances the next payment due date (unless the borrower requests
otherwise) and notifies the borrower of the revised due date.
Any refunds the Department receives from a school that are due a
borrower are applied against the borrower's outstanding principal.
The Department notifies the borrower of any refunds.
Periods of authorized deferment or forbearance are not included in
any repayment period. The actual number of payments a borrower
makes or the fixed monthly repayment amounts may be adjusted
over time to reflect changes in the variable interest rates.
A deferment is a period during which payments of principal on
Direct Loans are postponed. No interest is charged Direct Subsidized
Loan borrowers. Interest accrues and is charged Direct Unsubsidized
Loan and Direct PLUS Loan borrowers, who may pay the interest
during the deferment or have the interest added to the loan principal
(capitalized) at the deferment's end.
[[34 CFR 685.204]]
Once repayment begins, a borrower meeting certain requirements is
entitled to a deferment, although the borrower must REQUEST one
from the Department. The borrower should continue making
payments on the loan until he or she receives the Department's
written notice of the deferment's approval.
A deferment period begins when the condition that makes the
borrower eligible for a deferment begins, such as the date the
borrower becomes unemployed or enters study in a fellowship
program. A deferment may be granted retroactively from the date of
application for up to six months.
[[Effect of default]]
A borrower is not eligible for any deferments on a defaulted loan
unless he or she has made payment arrangements satisfactory to the
Department BEFORE the loan is transferred from the Direct Loan
Servicing Center to the Department's Debt Collection Service.
Borrowers should contact their Direct Loan Servicing Center to
make such arrangements.
[[The chart "Direct Loan Deferments for Borrowers With
Outstanding FFELs Made Between 7/1/87 and 6/30/93" on
page 11-30 is currently unavailable for viewing.
Please reference your paper document for additional information.]]
In general (see the exception below), there are five types of
deferments authorized for Direct Loans:
- in-school student status,
- study in an eligible fellowship program,
- study in an approved rehabilitation training program,
- full-time employment search, and
- economic hardship.
[[Deferments for borrowers with outstanding FFELs--34 CFR
If, at the time of application for a Direct Loan, a borrower has an
outstanding balance of principal or interest on any FFEL made,
insured, or guaranteed before July 1, 1993, the borrower is eligible
for additional deferments: for military service, temporary total
disability, volunteer service, parental leave, and medical internship.
(See the chart on the facing page for a summary of deferments for
loans made between July 1, 1987 and June 30, 1993).
Deferment provisions listed on existing promissory notes cannot be
removed. Additionally, future legislation may provide for new
deferment conditions that apply to ALL borrowers.
A deferment for at least half-time study at an eligible school is
referred to as an "in-school" deferment. Any school that meets the
definition of an institution eligible to participate in SFA Programs--
whether or not the school is currently participating--is an eligible
school for the purpose of an in-school deferment. However, if a
school has never been approved as eligible to participate in any SFA
Program, the Department must determine whether the school meets
the definition of an eligible institution before the school may certify
an in-school deferment. (See Chapter 3 for additional information on
institutional eligibility requirements.)
A borrower may receive deferments for study in a graduate
fellowship program approved by the Department.
Borrowers with disabilities may receive deferments for study in a
rehabilitation training program approved by the Department.
Borrowers in a residency program in dentistry may receive
deferments. Borrowers in MEDICAL internship or residency
programs do not qualify but may qualify for an economic hardship
deferment (see the next page).
A borrower seeking and unable to find full-time employment may
obtain a deferment for up to three years. The borrower must submit
the deferment request every six months, however, to affirm his or her
continuing employment search.
Borrowers experiencing economic hardship may be eligible for
deferments, not to exceed three years, but must submit a deferment
request every 12 months to affirm continuing eligibility. Any of the
following criteria qualifies a borrower for an economic hardship
- The borrower is receiving payment under a federal or state public
- The borrower is working full time and is earning a total monthly
gross income that does not exceed the greater of (1) the minimum
wage or (2) the poverty line for a family of two, as determined in
Section 673(2) of the Community Service Block Grant Act.
- The borrower is working full time and has an annual federal
education debt burden that is at least 20% of the borrower's
adjusted gross income. Defaulted loans are not included in the
education debt burden unless the borrower has made satisfactory
repayment arrangements (see Section 1). Additionally, the
borrower's income minus the educational debt burden must be less
than 220% of the greater of (1) the minimum wage rate or (2) the
poverty line for a family of two.
- The borrower is not working full time, and the borrower's total
monthly gross income from all sources is less than twice the
greater of (1) the minimum wage rate or (2) the poverty line for a
family of two. In addition, after deducting the total monthly
payments on federal education loans, the borrower's income from
all sources may not exceed the larger of (1) the minimum wage
rate or (2) the poverty line for a family of two.
- The borrower has been granted an economic hardship deferment
under the FFEL Program or the Federal Perkins Loan Program for
the same period for which the borrower is requesting an economic
hardship deferment under the Direct Loan Program.
For Direct PLUS Loan borrowers, it is generally the parent--not the
student--who must meet the criteria for deferment. For example, a
Direct PLUS Loan borrower can receive an in-school deferment if he
or she is enrolled at least half time in an eligible program of study at
an eligible school. The parent is not eligible if only the student for
whom the parent borrowed meets the requirements. However, a
parent with an outstanding Federal Stafford or PLUS Loan made
before July 1, 1993 qualifies for a deferment when a dependent
student for whom the parent borrowed a PLUS Loan is still
dependent and meets one of the following conditions:
- The student is attending an eligible school full time.
- The student is attending full time at an institution of higher
education or a vocational school that is operated by an agency of
the federal government.
- The student is enrolled in an eligible graduate fellowship program
or in an approved rehabilitation training program for the disabled.
- The student is attending an eligible school half time AND obtains a
Federal Stafford Loan or a Direct Loan for the same enrollment
period for which the parent is applying for a deferment. NOTE
THAT THIS REQUIREMENT DIFFERS FROM FFEL: Under
FFEL, in order for the parent to receive a deferment based on the
student's half-time enrollment, the student must ALSO have an
outstanding balance on a Stafford Loan or SLS borrowed on or
after July 1, 1987 but before July 1, 1993 AND, on the date the
student signed the promissory note for that loan, he or she had no
outstanding balance on another FFEL borrowed before July 1,
1987. These extra requirements do not apply under the Direct
During a period of forbearance, a borrower may stop payments
temporarily or make smaller payments than previously scheduled.
The Department grants forbearance for a period of up to one year.
Forbearance is renewable if the borrower requests it in writing and
the Department approves the request.
Although borrowers are relieved of paying principal during
forbearance, interest continues to accrue. If the borrower does not
pay the accruing interest during the forbearance period, the interest is
capitalized after the forbearance ends (see page 11-22 for a
discussion of capitalization).
A borrower may receive forbearance if he or she is willing but
unable to repay the loan. The borrower must request forbearance and
provide appropriate documentation showing that he or she qualifies.
The Department grants forbearance if
- it determines that due to poor health or other acceptable reasons,
the borrower or endorser is currently unable to make scheduled
- the borrower is in a medical internship or residency or dental
residency that must be successfully completed before the borrower
may begin professional practice or service, or the borrower is in a
medical internship or residency program or dental residency
program leading to a degree or certificate awarded by an
institution of higher education, a hospital, or health-care facility
that offers postgraduate training;
- a Direct Subsidized or Unsubsidized Loan borrower is serving in a
national service position for which the borrower is receiving a
national service educational award under the National Community
Service Trust Act of 1993 (DIRECT PLUS LOAN BORROWERS
ARE NOT ELIGIBLE FOR THIS FORBEARANCE); or
- the borrower's or endorser's monthly payments on federal
education loans are equal to or greater than 20% of the borrower's
or endorser's total monthly gross income (for not more than three
In certain instances, the Department grants forbearance without
requiring documentation from the borrower. These circumstances
include but are not limited to
- a properly granted period of deferment for which the Department
later learns the borrower did not qualify;
- a period for which payments are overdue at the beginning of a
- the period from the time the borrower entered repayment until the
first payment due date was established;
- the period prior to a borrower's filing a bankruptcy petition;
- a period after the Department receives reliable information
indicating the borrower (or the student in the case of a parent's
Direct PLUS Loan) has died or become totally and permanently
disabled--until the Department receives documentation verifying
those conditions; or
- a period necessary for the Department to determine a borrower's
eligibility for discharge (cancellation) under the bankruptcy,
closed school, or false certification provisions (see "Discharge"
Under certain circumstances, a borrower may qualify for forbearance
without submitting documentation. For example, forbearance may be
granted when the effect of a variable interest rate on a repayment
schedule extends repayment past the maximum repayment term. A
borrower affected by a natural disaster does not have to sign a
forbearance agreement but can simply phone his or her Direct Loan
Servicing Center to request forbearance.
Borrowers may also receive forbearance due to a national military
mobilization but must provide supporting documentation.
The Department may grant forbearance to borrowers whose loans are
delinquent or in default.
Under certain conditions, all or a portion of a borrower's loan debt
may be canceled or "discharged." Discharge provisions apply to
death or total and permanent disability, bankruptcy, closed schools,
and falsely certified loans. Discharged loans do not count against the
borrower's annual or aggregate Direct Subsidized Loan or Direct
Unsubsidized Loan limits.
[[Death and disability]]
If a borrower dies or becomes totally and permanently disabled, the
Department discharges the borrower's and any endorser's obligation
to make further loan payments. A Direct PLUS Loan borrower's (or
endorser's) debt also will be discharged if the student for whom the
parent borrowed dies. The parent (but NOT an endorser) continues to
be obligated to repay a Direct PLUS Loan if the student becomes
totally and permanently disabled.
A borrower is not considered totally and permanently disabled based
on a condition that existed when the borrower applied for the loan,
unless the borrower's condition substantially deteriorated after the
loan was made.
If a borrower's obligation to repay a Direct Loan is discharged in
bankruptcy, the Department does not require the borrower to make
any further payments on the loan. An SFA loan is NOT
dischargeable in bankruptcy, however, unless the debt has been
outstanding for at least seven years--excluding any deferment or
forbearance periods--or unless the bankruptcy court has determined
that repaying the debt would cause the debtor and his or her
dependents undue hardship.
[[Endorser NOT relieved of obligation to repay loan discharged in
Regulatory language stating a loan ENDORSER was also relieved of
the obligation to repay a loan discharged in bankruptcy was a
TECHNICAL ERROR that has been corrected in a regulation
published June 3, 1997. Direct PLUS Loan endorsers ARE required
to repay a loan discharged in bankruptcy.
[[Closed school discharge--34 CFR 685.213]]
Direct Subsidized or Unsubsidized Loans may be discharged if
borrowers are unable to complete their programs of study because
their schools closed or because the borrowers withdrew not more
than 90 days before their schools closed. If one of these conditions
applies to the student for whom a parent borrowed a Direct PLUS
Loan, the parent's loan will be discharged. The Department
discharges the obligation of the Direct Subsidized, Direct
Unsubsidized, and Direct PLUS Loan borrower (and any endorser)
and reimburses the borrower for any amounts already paid.
[[False certification/unauthorized payment discharge--
34 CFR 685.214]]
A Direct Subsidized or Unsubsidized Loan may be discharged if the
school falsely certified the borrower's eligibility or made an
unauthorized payment. If at least one of these conditions applies to
the student for whom a parent borrowed a Direct PLUS Loan, the
parent's loan will be discharged. A school is considered to have
falsely certified the loan if it
- falsely certified that a student had the ability to benefit from its
- signed the borrower's name on the loan application or promissory
note without the borrower's authorization, or
- certified a student who would not meet employment requirements
(in the student's state of residence at the time the loan was
originated) in the occupation for which the training program was
intended. A student would not meet employment requirements
because of a physical or mental condition, age, a criminal record,
or other reason acceptable to the Department.
A school makes an unauthorized payment if it endorsed the
borrower's loan check (or signed the borrower's authorization for
Electronic Funds Transfer) without the borrower's authorization,
unless the loan proceeds were delivered to the student or applied to
charges the student owed the school.
If a borrower meets the requirements for a discharge because of false
certification or unauthorized payment, the Department discharges the
borrower's and any endorser's obligation to make further loan
payments. Interest and collection fees, as well as loan principal, will
be discharged. The Department may attempt to collect from the
school the loan amount discharged, including any refund owed the
If otherwise eligible, a borrower whose defaulted loans are
discharged under these provisions regains eligibility for SFA funds.
In addition, any adverse credit history will be deleted from credit-
reporting agencies' records.
[[Payments after discharge]]
The Department returns to the sender (or to the borrower's estate)
any payments received after a borrower's loan has been discharged.
DEPARTMENT OF DEFENSE REPAYMENT
The Department of Defense (as an enlistment incentive) will repay a
portion of a student's Direct Loan if the student serves as an enlisted
person in certain specialities in the U.S. Army, the Army Reserves,
the Army National Guard, or the Air National Guard. For more
information, the student should contact his or her local Army or Air
National Guard recruiting office. This benefit does not pertain to an
individual's prior military service.
[[34 CFR 685.206(c)]]
A borrower may assert a defense against repaying a Direct Loan
based on any act or omission by his or her school that would give
rise to a cause of action against the school under applicable state law.
The borrower may assert the defense in any proceeding to collect on
a Direct Loan. Collection proceedings include, but are not limited to,
tax-refund offset proceedings, wage garnishment proceedings, salary
offset proceedings for federal employees, and credit bureau reporting
If the borrower's defense is successful, the Department notifies the
borrower in writing that he or she is relieved of the obligation to
repay all or part of the loan and associated costs and fees. The
Department may give the borrower further relief, as deemed
appropriate, based on the borrower's circumstances. Further relief
may include but is not limited to
- reimbursing the borrower for amounts paid toward the loan
voluntarily and through enforced collection,
- determining that the borrower is not in default on the loan and is
eligible to receive assistance from SFA funds, and
- updating information to credit bureaus in cases where the
Department had made adverse credit reports about the borrower's
A successful borrower's defense may result in the Department
requiring the school to repay the funds and purchase the loan.