Federal Student Aid - IFAP
   
AwardYear: 1997-1998
EnterChapterNo: 10
EnterChapterTitle: Federal Family Education Loan Program
SectionNumber: 4
SectionTitle: Repayment
PageNumbers: 45-56


Grace Periods

A "grace period" is the period of time before the borrower must
begin or resume repaying a loan. An "initial grace period" is one that
immediately follows a period of enrollment and immediately
precedes the date repayment is required to begin for the first time.

For borrowers who have been attending at least half time, initial
grace periods are six consecutive months after the borrower drops
below half-time study at an eligible institution or at a comparable
school outside the United States. The exception to this rule is a
borrower with a Stafford Loan at the 7% interest rate. This borrower
has a 9- to 12-month grace period, which is set by the lender or the
guaranty agency and is shown on the promissory note the borrower
signs.

It is important to note that grace periods are always day-specific; that
is, an initial grace period begins on the day immediately following
the day the borrower ceases attending school at least half time and
ends on the day before the repayment period begins. A borrower has
ceased attending at least half time for the following reasons: because
the student has completed the course of study, because the student
has dropped out of school or has dropped below half-time status, or
because the student transfers to a school that is not considered an
eligible school for in-school deferment purposes (see Section 5 for
more information). The borrower may request a shorter grace period.

[[Correspondence courses and grace periods]]
For correspondence students, the grace period begins on the earliest
of the following three dates:

- the date the borrower completes the program

- the date that is 60 days after the school's deadline for completing
the program

- the date on which the borrower falls 60 days behind the due date
for submitting a scheduled assignment.

For information on eligible correspondence programs, see Chapter 3.

For a student attending at least half time, the initial grace period does
not end until he or she ceases to be enrolled at least half time for a
CONTINUOUS period of six months. A borrower who returns to school
on at least a half-time basis prior to completion of the initial grace
period is entitled to a full initial grace period, calculated as six
consecutive months, from the date that he or she drops below half-
time enrollment again. Suppose, for example, that a borrower takes
out a loan in the fall quarter, drops out of school for the winter
quarter, and resumes at least half-time study for the spring quarter.
The borrower would still be entitled to a full initial grace period once
he or she again leaves school or drops below half-time status.

[[Borrower with SLS loan]]
If a borrower has a Federal Supplemental Loans for Students (SLS)
loan that has not yet entered repayment and a Federal Stafford Loan
that has not yet entered repayment, the borrower may request that he
or she be allowed to delay repayment on the SLS loan for the period
equivalent to the Stafford Loan grace period so that repayment on
both loans can begin at the same time. (Note that no new SLS loans
are being made; the SLS Program was repealed beginning with the
1993-94 award year.)

[[Post-deferment grace periods]]
A borrower with Stafford Loans made prior to October 1, 1981 is
entitled to a six-month POST-DEFERMENT grace period following
any deferment. The one exception is the unemployment deferment.
Although a borrower may have several periods of unemployment
deferred, he or she may receive a post-deferment grace period ONLY
following the first unemployment deferment.


INTEREST RATES

Federal Stafford Loans

In the past, the interest rate on a borrower's first Stafford Loan
applied to all subsequent Stafford Loans, as long as he or she had an
outstanding balance on a loan at that interest rate when subsequent
loans were obtained. However, the Technical Amendments of 1993
changed the law to enable borrowers with fixed interest rates on
earlier Stafford Loans to obtain the variable interest rate previously
available only to new borrowers.

Interest rates for Stafford Loans (subsidized and unsubsidized)
follow:

- For a loan disbursed on or after October 1, 1992 and before July 1,
1994 to a borrower with no FFELs (either subsidized or
unsubsidized) outstanding, the interest rate is variable and is
determined on June 1 of each year.

- The rate will be based on the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction before June 1
plus 3.1%.

- The interest rate for these loans may not exceed 9%.

- For loans first disbursed on or after July 1, 1994, the interest rate
is variable and is determined on June 1 of each year, regardless of
whether that borrower has FFELs outstanding.

- The rate will be based on the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction before June 1
plus 3.1% (except during in-school, grace, and deferment
periods for loans that are first disbursed on or after July 1, 1995
but prior to July 1, 1998).

- The interest rate for these loans may not exceed 8.25%.

For example, a borrower who has outstanding Stafford Loans with
interest rates of 9% or 7% and whose newest Stafford Loan is
disbursed on September 1, 1997 will receive a variable interest rate
on that loan. The terms and conditions (and interest rates) of the prior
loans will still apply to those prior loans unless the loans are
converted to a variable interest rate because they are subject to
rebates of excess interest (see next page).

The variable interest rate for July 1, 1996 through June 30, 1997 for
the first category of loans (loans disbursed on or after October 1,
1992 and before July 1, 1994) is 8.26%. The variable interest rate for
July 1, 1996 through June 30, 1997 for the second category of loans
(loans first disbursed on or after July 1, 1995 but prior to July 1,
1998) is 8.25%.

As stated, during in-school, grace, and deferment periods for loans
that are first disbursed on or after July 1, 1995 but prior to July 1,
1998, the interest rate is not the same as it is during repayment.
Instead of being based on the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction before June 1 PLUS
3.1%, the rate is based on the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction before June 1 PLUS
2.5%. For this category of loans, the interest rate for July 1, 1996
through June 30, 1997 is 7.66%.

If an annual adjustment in a borrower's variable interest rate will
prevent the loan from being repaid within the maximum allowable
repayment period under the current repayment schedule, a lender
must either make an adjustment in the borrower's monthly payment
amount or grant a mandatory administrative forbearance as described
in Section 5 of this chapter.

Conversion of Loans to a Variable Interest Rate

Certain fixed-rate loans disbursed in the past are also now subject to
conversion to a variable interest rate. The Technical Amendments of
1993 required lenders to convert most loans SUBJECT TO REBATE
OF EXCESS INTEREST to variable rate loans by January 1, 1995.
The variable rate depended on the type of loan converted but could
not exceed the original fixed interest rate of the loan as specified in
the promissory note. The loan holder was required to inform the
borrower of the conversion to a variable rate at least 30 days prior to
conversion.

Loans subject to a rebate of excess interest and conversion to a
variable rate are

- Stafford Loans at 8% changing to 10% after four years of
repayment

- If made before July 23, 1992, such a loan becomes subject to a
rebate only when the interest rate increases to 10%

- If made to a first-time borrower on or after July 23, 1992 and
before October 1, 1992, such a loan becomes subject to a rebate
only when the interest rate increases to 10%

- If made to a repeat borrower on or after July 23, 1992 and
before July 1, 1994, such a loan is subject to a rebate on the date
the loan is made;

- 7%, 8%, and 9% fixed-rate Stafford Loans made to repeat
borrowers on or after July 23, 1992 and before July 1, 1994.

Loans subject to rebate of excess interest are explained in more detail
in the November 30, 1994 FFEL Final Rule.

Federal PLUS Loans

All Federal PLUS Loans made on or after July 1, 1987 have variable
interest rates, determined on June 1 of each year according to a
prescribed formula and is effective for the following July 1 through
June 30.

The variable interest rate for a PLUS Loan first disbursed on or after
July 1, 1987 and before October 1, 1992 must not exceed 12%. The
interest rate for these PLUS loans for July 1, 1996 through June 30,
1997 is 8.87%.

The variable interest rate for a PLUS Loan first disbursed on or after
October 1, 1992 and before July 1, 1994 may not exceed 10%. The
interest rate for these PLUS Loans for July 1, 1996 through June 30,
1997 is 8.72%.

The variable interest rate for a PLUS Loan disbursed on or after July
1, 1994 and before July 1, 1998 must not exceed 9%. 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. The variable interest rate for these
PLUS Loans for July 1, 1996 through June 30, 1997 is 8.72%.

Annual adjustments in interest rates may alter monthly payment
amounts from year to year. 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.

ADDITIONAL COSTS OF BORROWING

Loan Fees

In addition to interest, FFEL borrowers also pay insurance premiums
and origination fees on their loans. A lender charges each FFEL
borrower an origination fee. A guaranty agency charges the lender an
insurance premium on each loan it guarantees. Generally, the lender
passes this cost on to the borrower.

The origination fee that a lender must charge the borrower is 3% of
the principal amount of the loan. A lender must deduct (collect) the
origination fee proportionately from each disbursement.

The maximum insurance premium that a guaranty agency may
charge the lender of a Stafford Loan or PLUS Loan is a one-time fee
not to exceed 1% of the principal amount of the loan. If the lender
passes this charge on to the borrower, the fee must be deducted
proportionately from each disbursement of the loan.

[[Proration of fees]]
The origination fee and insurance premium, or appropriate prorated
amounts of those fees, must be refunded by application to the
borrower's account if

- the school returns the loan or a portion of the loan to the lender,

- the loan check has not been negotiated within 120 days of
disbursement,

- the loan is repaid in full within 120 days of disbursement, or

- the loan proceeds were disbursed by electronic funds transfer
(EFT) or by master check and the school has not released these
funds from its restricted account within 120 days of disbursement.

Late Charges

If a borrower fails to pay all or a portion of a required installment
within 15 days after it is due, the lender may require the borrower to
pay a late charge (if authorized by the borrower's promissory note).
This charge may not exceed six cents for each dollar of each late
installment.

Collection Charges

If authorized by the borrower's promissory note, and notwithstanding
any provisions of state law, a lender may require that a borrower or
an endorser pay costs the lender or its agents incurred in collecting
installments not paid when due. These charges, include but are not
limited to

- attorney's fees,

- court costs, and

- telegrams.

These costs may not include routine collection costs associated with
preparing letters or notices or with making personal contacts with the
borrower (for example, local and long-distance telephone calls).

REPAYMENT OF FEDERAL STAFFORD LOANS

While the borrower is in school at least half time (before the
expiration of his or her grace period), the federal government pays
the interest on a subsidized Stafford Loan on the his or her behalf.
For an unsubsidized Stafford Loan, interest accrues during this
period, and the borrower is responsible for paying it. The borrower
may pay the interest while he or she is in school, or the lender will
capitalize it (that is, add it to the principal balance).

[[Maximum repayment period]]
The loan repayment period for a Stafford Loan (subsidized or
unsubsidized) begins the day after the grace period ends and ends no
later than 10 years from that date (excluding periods of deferment
and forbearance). Generally, the first payment on a Stafford Loan is
due no later than 45 days after the first day that repayment begins.
The lender must notify the borrower of the date and amount of the
first payment as part of a repayment disclosure that must be sent to
the borrower no less than 30 days before the date that the first
payment is due and no more than 240 days before that date.

Determining a Student's Withdrawal Date

The student's withdrawal date is the date that the student notifies an
institution of his or her withdrawal or the date of withdrawal
specified by the student, whichever is later. If the student does not
withdraw officially (that is, he or she drops out of school without
notifying the school), the last recorded date of the student's class
attendance, as documented by the school, is the student's withdrawal
date. An institution must determine the withdrawal of a student who
drops out in a timely manner. This date must be determined within
30 days after the expiration of the earliest of these three periods:

1) the period of enrollment for which the student has been charged;

2) the academic year in which the student withdrew

3) the educational program in which the student withdrew

In the case of a student who does not return from a summer break,
the school shall determine the student's withdrawal date no later than
30 days after the first day of the next scheduled term.

[[Leave of absence]]
A student who has been granted a leave of absence is not considered
to have withdrawn from school. If a student fails to return from an
approved leave of absence (whether approved or unapproved), the
withdrawal date is the last recorded date of class attendance. This
date is used regardless of whether the student withdraws officially
(by notifying the school) or unofficially (by discontinuing attendance
without notifying the school).

[[Correspondence course/withdrawal date]]
For correspondence study, the withdrawal date is the date of the last
lesson the student submitted. For appeal procedures with regard to
the withdrawal date for correspondence study, see 34 CFR
668.22(j)(1)(iii).

The refund policy for students who have withdrawn, who have
dropped out, or who have not returned from an approved or
unapproved leave of absence is explained in Section 11.

IT IS THE STUDENT'S RESPONSIBILITY TO NOTIFY THE
LENDER OF THE DATE ON WHICH HE OR SHE CEASES TO
BE ENROLLED AT A PARTICIPATING SCHOOL AT LEAST
HALF TIME. The financial aid administrator should emphasize to
students the importance of that responsibility. Upon receiving
notification of this critical date, the lender will send a repayment
schedule to the borrower. If a loan sale or transfer requires the
borrower to send payments to a new address, the present and former
holders of the loan (either jointly or separately) must notify the
borrower of the change within 45 days of the sale or transfer. This
notification should spell out the borrower's obligations to the new
loan holder.

Loan Repayment Schedules

Provisions of a loan repayment schedule must agree with those in the
promissory note and the loan disclosure statement. Generally, a
borrower has from 5 to 10 years to repay a loan in full. Any periods
of authorized deferment or forbearance are not counted in the
repayment period.

[[Prepayment]]
A borrower may prepay all or part of a loan at any time without
penalty. A lender has the option of crediting the payments first to late
charges or collection costs, then to outstanding interest, and then to
unpaid principal. If the borrower submits a payment amount that
equals or exceeds the normal monthly payment amount and does not
provide instructions for handling the excess payment amount, the
lender must apply the excess to future installments, advancing the
next payment due date.

[[Minimum payment amount]]
In general, the minimum total scheduled payments to all holders of a
borrower's FFELs must be at least $600 per year. Loan payments for
Stafford Loans, however, usually exceed these minimums because of
the 10-year statutory limit on repayment. Monthly payment amounts
may not be set at less than the amount of interest due. The lender
may round up the loan payment to ensure that the payment is a
multiple of $5. The lender may require a repayment period of less
than 5 years, if necessary, to ensure that the above minimum
payments are met. Note that the $600-per-year minimum combined
annual payment for a married couple with Stafford Loans is no
longer permitted.

Repayment Plans

Lenders are required to offer the option of standard, graduated, or
income-sensitive repayment to new Stafford or SLS borrowers. A
new borrower is defined as someone who borrows on or after July 1,
1993 and who, at the time he or she borrows, has no outstanding
balance on a FFEL borrowed before that date. The Secretary
encourages lenders to offer this flexible range of repayment options
to all other borrowers.

The choice of repayment plans must be provided to borrowers not
earlier than six months before the date of the first scheduled loan
payment. Even if a borrower does not choose a particular plan, the
lender is permitted to require the borrower to repay all of his or her
FFELs under one repayment schedule.

A lender may agree to a standard, graduated, or income-sensitive
repayment schedule for a new Stafford or SLS borrower, as long as
the minimum annual payment and maximum time period
requirements are met and as long as scheduled monthly payments
cover at least the monthly interest charges. A borrower must respond
to a lender's offer of a choice of repayment options within 45 days
after the lender makes the offer, or he or she will be required to repay
under a standard repayment schedule.

[[Standard repayment]]
The standard repayment plan has a fixed monthly payment amount.
This amount may vary annually if an adjustment in a borrower's
variable interest rate necessitates a change in his or her repayment
schedule.

[[Graduated repayment]]
The graduated plan has a varying monthly payment amount. This
amount starts increases incrementally during the repayment period. If
a graduated repayment schedule is established, however, no single
payment can be scheduled to be more than three times greater than
any other scheduled payment.

[[Income-sensitive repayment]]
Under an income-sensitive repayment schedule, the amount of a
borrower's installment payment is adjusted annually, based on the
borrower's expected total monthly gross income. In general, the
lender will request from the borrower information on his or her
income no earlier than 90 days before the due date of the borrower's
first payment. The income information must be sufficient for the
lender to make a reasonable determination of what the borrower's
payment amount should be. If a lender receives late notification that
a borrower has dropped below half-time enrollment status at a
school, the lender may request the income information earlier.

If a borrower reports income that a lender considers to be insufficient
to establish monthly payments that would repay a loan within the
maximum 10-year repayment period, the lender shall require the
borrower to submit evidence showing the amount of the most recent
total monthly gross income he or she has received from employment
and from other sources.

A lender must grant forbearance to a borrower for a period of up to
five years of payments if the income-sensitive monthly payment
amount would prevent the borrower from repaying the loan within
the maximum repayment period.

If a borrower chooses the income-sensitive plan but then does not
provide any documentation that may be required for repayment
under that plan, the lender may require that borrower to repay his or
her loans under the standard repayment option.

REPAYMENT OF FEDERAL PLUS LOANS

There is no interest subsidy for PLUS Loan borrowers; the borrower
is responsible for all interest that accrues on the loan while the
student is in school and during periods of authorized deferment and
forbearance.

The repayment period for a PLUS Loan begins on the date the last
disbursement is made. The repayment period for a PLUS Loan ends
no later than 10 years after repayment begins, excluding periods of
authorized deferment and forbearance.

A PLUS Loan borrower's first payment of principal and interest is
due within 60 days after the loan is fully disbursed, unless a
deferment conditions applies. See the following section on
deferments for more information.

[[PLUS Loan minimum payment amount]]
As stated in the discussion of Stafford Loans, the minimum total
scheduled payments to all holders of a borrower's FFELs must be at
least $600 per year. This minimum also applies to PLUS Loans. A
borrower must pay a total of at least $600 per year on all of his or her
PLUS Loans. If the borrower also received FFELs as a student, he or
she must pay a total of at least $600 per year on all of his or her
PLUS Loans and student FFELs combined. Monthly payment
amounts may not be set at less than the amount of interest due. The
lender may round up the loan payment to ensure that the payment is
a multiple of $5. The lender may require a repayment period of less
than 5 years, if necessary, to ensure that the above minimum
payments are met.

[[Prepayment]]
There is no prepayment penalty for PLUS Loans. A lender may
agree to a standard, graduated, or an income-sensitive repayment
schedule for a PLUS Loan borrower, 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, after a parent obtains a PLUS Loan, 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 parent's 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.

CAPITALIZATION OF INTEREST

Capitalization is the addition of accrued interest to a borrower's loan
principal. The interest accruing during the period from the date of
first disbursement of the loan to the beginning of the borrower's
enrollment period, and during the period from the date the first loan
payment was due until it was made may be capitalized on the date
repayment is scheduled to begin. Interest may be capitalized no more
frequently than quarterly and any time repayment begins or resumes.
Generally interest is capitalized when a borrower elects not to pay it
(or fails to pay it) during forbearance or during in-school, grace, and
deferment periods on unsubsidized Stafford Loans and PLUS Loans.
(On subsidized Stafford Loans, interest is paid by the federal
government during the last three periods mentioned.)

If a borrower has agreed to pay interest during a deferment or
forbearance period or during an in-school or grace period but fails to
resolve a payment delinquency, the lender also may, after notifying
the borrower, capitalize the delinquent interest and all interest
accruing for the remainder of the period of deferment or forbearance.
The borrower should understand that capitalization of interest
increases the principal balance of the loan.

REPAYMENT DISCLOSURE STATEMENT AND BILLING

A lender must provide a Stafford Loan borrower with a repayment
disclosure statement not less than 30 or more than 240 days before
the borrower's first payment is due. In addition, the lender or holder
of the loan must notify the borrower--not later than 120 days after
the borrower has left school--of the date repayment begins.

The repayment disclosure statement must provide the borrower the
following information:

- the name and address of the lender and the address to which
communications and payments should be sent;

- the estimated balance owed by the borrower on the loans covered
by the disclosure statement as of the date on which repayment is
due to begin (including capitalized interest, if applicable);

- the stated interest rate on the loan or loans, or the combined
interest rate of loans with different rates;

- the amount of the loan, the insurance premium, the loan
origination fee, and any other charges, and how they are to be
paid;

- the repayment schedule, including when repayment will begin
(due date of first payment), when accrued interest must be paid,
and the number, amount, and frequency of required repayments;

- refinancing and consolidation options;

- for subsidized Stafford Loans, the projected total of interest
charges the borrower will pay, if payments are made according to
the repayment schedule; for unsubsidized Stafford Loans and
PLUS loans, sample projections of monthly payments at various
interest rates and with interest capitalization; and

- a statement explaining the borrower's right to make prepayments.

[[Lender treatment of several loans of same type]]
Lenders are encouraged to treat all of a borrower's loans of the same
type as one loan for billing and deferment purposes. A borrower with
several Stafford Loans held by a single lender would, therefore,
receive one billing notice for all of his or her loans; any deferment
received for one of the loans would apply to all of the borrower's
Stafford Loans held by that lender. In addition, guaranty agencies
must try to ensure that a borrower's loans are maintained by one
lender, one loan holder, and one loan servicer, in order to reduce the
number of agencies contacting the borrower. These efforts to
simplify loan repayment are to be made with the cooperation of the
borrower.