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. Interest rates are determined on June 1 each year and apply to the following month period from July 1 to June The rate for these loans for July 1, through June 30, is 7.
The rate for these loans for July 1, through June 30, is 8. Note that this formula is also used for any Direct Subsidized or Unsubsidized Loan first disbursed before July 1, , in any period.
For Direct Subsidized and Unsubsidized Loans first disbursed on or after July 1, , 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 month period from July 1 to June The rate will not exceed 8.
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, , except the rate will equal the bond equivalent rate of the security with a comparable maturity, that the Department will establish, plus 2. Specific information on which securities' bond equivalent rates will be used was not available at the time this Handbook went to print.
The Department will issue further guidance on this topic at a later date, in the form of a "Dear Colleague" Letter. 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. Accrued interest is capitalized annually for Direct Subsidized and Unsubsidized Loans repaid under the Income Contingent Repayment ICR 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 for more information on repayment plans and for more information on ICR capitalization. The Department may capitalize unpaid interest on any Direct Loan that defaults. 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.
A prorated portion of the fee is deducted from each disbursement. If the loan is canceled or the loan amount is adjusted downward within 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 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. Currently, the Department is not charging late fees. 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 costs. 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 and "Forbearance" on page 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.
The borrower is required to state in writing, within the 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. 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.
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 principal. The Repayment Book explains repayment plans in detail.
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. 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. 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.
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 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 Repayment Book for more information on alternative documentation. If the borrower has made payments under the Standard Plan or the year Extended Plan and then switches to the ICR Plan, those earlier payment periods are counted toward the year repayment period. Earlier payment periods in other plans do not count toward the 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. 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. 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 may require evidence of exceptional circumstances. The repayment period under an alternative repayment plan may not exceed 30 years from the date the Direct Loan enters repayment. The maximum time frame 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. 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.
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.
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. The school compares the two fractions required for fixed proration: [[The fractions on page are currently unavailable for viewing.
Of course, a student who drops courses must still be enrolled at least half time to be eligible for any loan amount. 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. Interest rates are determined on June 1 each year and apply to the following month period from July 1 to June For loans first disbursed between July 1, and June 30, that are in in- school, grace, or deferment periods, the interest rate equals the bond equivalent rate of the day Treasury bills auctioned at the final auction before June 1, plus 2.
For loans first disbursed between July 1, and June 30, that are NOT in in- school, grace, or deferment periods, the interest rate equals the bond equivalent rate of the day Treasury bills auctioned at the final auction before June 1, plus 3. Currently, the interest rate for Direct PLUS Loans equals the bond equivalent rate of the week Treasury bills auctioned at the final auction before June 1, plus 3.
For Direct Subsidized and Unsubsidized Loans first disbursed on or after July 1, , 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 month period from July 1 to June The rate will not exceed 8. The same calculation applies to Direct PLUS Loans first disbursed on or after July 1, , except the rate will equal the bond equivalent rate of the security with a comparable maturity, that the Department will establish, plus 2.
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. 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 for more information on repayment plans and for more information on ICR capitalization.
The Department may capitalize unpaid interest on any Direct Loan that defaults. 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. A prorated portion of the fee is deducted from each disbursement. If the loan is canceled or the loan amount is adjusted downward within 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 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.
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 costs. 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 and "Forbearance" on page In this case, the student is enrolled in a final period of study that is shorter than an academic year.
The borrower is required to state in writing, within the 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.
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. 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 principal.
The Repayment Book explains repayment plans in detail. 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.
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.
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.
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 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 Repayment Book for more information on alternative documentation.
If the borrower has made payments under the Standard Plan or the year Extended Plan and then switches to the ICR Plan, those earlier payment periods are counted toward the year repayment period. Earlier payment periods in other plans do not count toward the 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.
Department of Health and Human Services guidelines. The late charge may not exceed six cents for each dollar of each late installment. Currently, however, the Department is not charging late fees. Such charges do not include the 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 Consolidation Loan in default, the Department may require the borrower or any endorser to pay additional costs.
A single consolidation application is used, even if the borrower is consolidating more than one type of loan, such as subsidized student loans and unsubsidized student loans or subsidized student loans and PLUS Loans if the borrower has a loan for his or her dependent student as well as a loan for him- or herself.
Borrowers may add pre-existing eligible loans to a newly created Direct Consolidation Loan without submitting a new application; borrowers simply submit a request to the Department within days after the loan is originated see "Subsequent Consolidation" on page The two types of consolidation, "regular" and "in-school," are discussed below.
Basically, however, borrowers may consolidate loans any time after they are fully disbursed. Note that married borrowers may consolidate jointly. Borrowers in default also are permitted to consolidate under certain circumstances see page Consolidation eligibility criteria vary somewhat depending on when borrowers consolidate and whether they are in default. All Direct Consolidation Loan borrowers, however, receive the same deferment, forbearance, and discharge provisions available to borrowers of other Direct Loans see Section 2.
Note that a borrower who consolidates a loan that is in deferment must reapply for the deferment once the loan is consolidated. A loan is also considered to be in an in-school period if the borrower entered but never completed the grace period because the borrower reenrolled at least half time at an eligible school before the grace period expired. Regular Consolidation Borrowers consolidating at least one fully disbursed Direct Loan or FFEL, none of which is in an in-school period,2 may consolidate under what is known as the regular Direct Consolidation Loan process.
Borrowers may also include other student loans, such as Federal Perkins Loans and eligible health professions student loans see the chart on page The status of the Direct Loan or FFEL to be consolidated determines whether the borrower has a regular or an in-school consolidation loan. A borrower can be enrolled in an eligible school at least half time and still consolidate under the regular Direct Consolidation Loan process.
For example, a borrower who enrolled full time in an eligible school but had two FFELs in repayment before enrolling would qualify under the regular consolidation process. It is the status of the loans being consolidated that must be considered. Joint consolidators are held jointly and severally liable for their consolidation loan, however. Both borrowers must qualify for deferment, forbearance, and discharge, unless a discharge is due to school closure or false certification.
In those two cases, only one borrower has to qualify; however, only the portion of the Direct Consolidation Loan affected by the school closure or false certification can be discharged. Fribitz closes three months later. TIP: Counsel married borrowers to decide carefully about joint consolidation. If one spouse dies or becomes totally and permanently disabled, for example, the other spouse is responsible for paying the entire consolidation loan.
The loan would be discharged for a single borrower in such situations. Each spouse may want to consolidate separately to minimize risk. Regular consolidation requires that borrowers both borrowers, if married and consolidating jointly have no federal consolidation loan applications pending with any other lenders for example, a FFEL Program lender.
Also, borrowers must agree to notify the Department of any address change. There is no grace period. Once the loans are consolidated, any payments a borrower makes to the original holders will be sent to the Department to reduce the Direct Consolidation Loan balance. In-School Consolidation In-school consolidation requires borrowers to meet the requirements for regular consolidation, with some exceptions.
Unlike regular consolidation, borrowers eligible for in-school consolidation may consolidate only Direct Loans or FFELs; the other types of federal education loans listed in the chart on page 44 may be consolidated only after borrowers leave school. Borrowers attending Direct Loan schools must consolidate at least one fully disbursed Direct Loan or FFEL that is in an in-school period see the definition of in-school period on page Note that borrowers can qualify simply by consolidating one Direct Loan that is in an in-school period.
The spouse can qualify simply by consolidating one Direct Loan that is in an in-school period. At least one FFEL must be in an in-school period. Such borrowers do not have to certify that they have been unable to obtain Federal Consolidation Loans--FFEL borrowers currently are not permitted under the Federal Consolidation Loan Program to consolidate a loan in an in-school period.
The examples on the next page show how in-school consolidation works.
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