Frequently Asked Questions

1. Is everyone eligible for federal student assistance?

No. There are a number of requirements to get federal aid. The first requirement is that you must be a student pursuing higher education. You must also be enrolled in a degree, certificate, or other approved program at an eligible higher education school. You must be a U.S. citizen or eligible noncitizen. In addition, you must have a valid Social Security number and register with the Selective Service if required. There is a relatively new rule that suspends your eligibility for federal student aid if you have a conviction for sale or possession of illegal drugs. The period of ineligibility based on drug conviction varies.

2. Must I have a high school diploma?

No. You are eligible for financial aid even if you don’t have a high school diploma, but the school must certify that you can benefit from the instruction by giving you a valid “ability-to-benefit” (ATB) test. You must pass this test if you don’t have a high school diploma or equivalency at the time of admission.

3. Is assistance based on financial need?

In most cases, yes. Most federal financial aid is awarded on the basis of financial need. There are a couple of important exceptions. You can get an unsubsidized Stafford loan without having to demonstrate financial need. Loans for parents (PLUS) loans are also unsubsidized and not dependent on financial need. Interest is charged on unsubsidized loans from the time the loan is disbursed until it’s paid in full. In contrast, interest on subsidized loans is not charged until repayment begins.

4. Can parents borrow to finance their children’s education?

Yes. Parents can apply for the PLUS loan program to help pay education expenses for dependent undergraduate students. Parents have to pass a credit check to qualify.

5. What are the different types of student loans and what’s the difference between them?

Federal Stafford loans are made through the Direct Loan Program and the Federal Family Education Loan (FFEL) program. The major difference between the Direct Loan and the FFEL Program is that Direct Loans are originated by the government and FFEL loans by private lenders. There are also some differences in repayment options. Stafford loans may be either subsidized or unsubsidized. (see question # 3 above).

Perkins loans are low-interest loans for both undergraduate and graduate students with exceptional financial need. Perkins loans are originated and serviced by participating schools and repaid to the schools.

PLUS loans allow parents to borrow to pay for the education of dependent undergraduate children enrolled in school at least half time.

These are the main federal financial loan programs. There are also federal grant programs such as Pell grants as well as many state financial assistance programs. In addition, there are a growing number of private lenders that offer student loans.

6. What happens after I finish school? Do I have to pay my loans back right away?

In most cases, no. The repayment date varies depending on the type of loan you have. Stafford loan repayment generally begins six months after graduation. The time before you have to start repaying is called a grace period. You don’t have to pay any principal on the loan and you won’t be charged interest during the grace period if you have a subsidized loan. During the grace period on an unsubsidized loan, you don’t have to pay any principal, but you will be charged interest. You can choose to pay the interest during the grace period. Perkins loan repayment usually begins nine months after graduation. Parent PLUS loans must be paid back within 60 days after the final loan disbursement for the period of enrollment for which the parent borrowed. There is no grace period for these loans.

7. What happens if I drop out? Do I still have to pay back my loans?

You may cancel all or a portion of your loan if you inform the school within 14 days after the school sends you notice that it is crediting your account. If you withdraw later than that, there is a formula that schools must use to determine the amount of assistance you have earned up until your withdrawal date. If you received more assistance than you earned, the excess funds must be returned. If you received excess funds, your school should help explain what portion needs to be returned.

The amount of financial assistance you’ve earned is calculated on a pro-rata basis. For example, if you completed 30 percent of the payment period or period of enrollment, you earned 30 percent of the assistance you were originally scheduled to receive. Once you’ve completed more than 60 percent of the payment period or period of enrollment, you earn all of your assistance. You are generally responsible for paying back the assistance you have earned.

8. Do I have to pay back my loans if the school didn’t provide quality instruction?

Probably. However, you may have some options particularly if the school deceived you by promising something that it didn’t deliver. You may be able to raise deception or fraud as a defense if you are later sued for collection. The problem is that it is very difficult to get the lender on the hook for problems caused by the school. You should be eligible to cancel your loan if the school closed while you were in attendance or within 90 days of when you withdrew (see # 11 below). Be sure to send complaints about the school to both the state and federal departments of education. The sooner you complain, the more likely you can get help.

9. What can I do if I can’t pay back my loans?

The answer depends first on whether you are already in default. You have a lot more options if you haven’t yet defaulted. In general, you will be in default if you haven’t made your payments for nine months.

One way to stay out of trouble before default is to change your payment plan to a more affordable plan. Although the options vary depending on the type of loan you have, every program gives you choices beyond the standard repayment plan. Both the FFEL and Direct Loan programs have payment plan options for low-income borrowers. The Direct Loan program offers an income contingent repayment plan (ICRP) and the FFEL program has an income-sensitive repayment plan (ISRP). Under these plans, your monthly loan payment is based on your annual income, family size and loan amount.

You can also postpone (or defer) your payments if you are not yet in default (see #10 below). Additionally, you can apply for forbearance whether you are in default or not. Forbearance is a temporary stoppage of payments, extension of time to make payments, or acceptance of smaller payments. Unlike deferments, interest continues to accrue while you are in a forbearance period.

10. What types of deferments are available?

The deferments are somewhat different depending on the type of loan you have. The following deferments are available for most loans disbursed after July 1993:

• student deferments for at least half-time study,
• graduate fellowship deferments,
• rehabilitation training program deferments,
• unemployment deferments not to exceed three years, or
• economic hardship deferments, granted one year at a time for a maximum of three years.

11. What types of cancellations are available?

Cancellations vary by type of loan. In particular, the Perkins loan program has many more options than other loan programs. The key cancellation options for all federal loan programs are:

• closed school (the school closed while you were enrolled or close to the time you withdrew),
• false certification (the school falsely certified your eligibility, usually because you were not a high school graduate and there was a problem with the ability-to-benefit test),
• borrower’s permanent and total disability,
• borrower’s death,
• unpaid refund (partial or full cancellation if the school failed to pay a refund owed),
• limited cancellations for teachers working in certain designated low-income areas or teaching high-need subjects such as math and science.

You should always check first to see whether you are eligible for a cancellation. This is the most complete way to get out of trouble. If you apply and qualify, your loan will be cancelled, any money you paid voluntarily or involuntarily should be returned, and your credit report should be cleared up.

12. How do I apply for a cancellation?

You usually have to apply in writing. There are different forms for different types of cancellations. The forms are available on the Department of Education web site or by calling the Federal Student Aid Line, 1-800-4-FED-AID. They are also reprinted in the National Consumer Law Center’s publication, Student Loan Law.

13. What can the government do to collect from me if I can’t repay my loans?

The government has collection powers far beyond those of most private creditors. Once you are in default, they can try to collect from you in the following ways:

• By seizing your tax return,
• Garnishing a portion of your wages,
• Taking a portion of certain federal benefits such as Social Security retirement, or
• Suing you in court.

Like most creditors, the government will also report delinquencies and defaults to credit reporting bureaus. Even before you are in default, if you stop paying back your loans, you will begin to receive collection letters and phone calls informing you of the various powers the government can use to collect from you.

14. Doesn’t the government have to sue me first before garnishing my wages, seizing my tax return or taking my federal benefits?

No.

15. Does the government have a time limit when they have to stop collecting from me?

In general, there is no statute of limitations for student loan collections. However, there may be a ten year limit for federal benefits offsets only. This issue is currently being litigated.

16. Can I go back to school if I already have an outstanding student loan?

You can go back to school, but you are not eligible for new financial assistance if you are in default on previous loans. You can become eligible again if you can get out of default.

17. Can I discharge my student loan in bankruptcy?

Only in very limited circumstances. You must show that repaying your student loan will cause “undue hardship.” You can find out more about this standard in the National Consumer Law Center’s publication, Student Loan Law.

18. What is loan consolidation?

Loan consolidation generally allows you to lower monthly payments by combining several loans into one packaged loan and extending your repayment period. It is similar to refinancing a mortgage loan. You can even consolidate just one loan. There are two main types of consolidation loans. Direct Consolidation loans are available through the Department of Education. FFEL Consolidation loans are available from participating lenders. There are some important differences between the two programs.

To find out more about FFEL loan consolidation, you will need to contact private lenders. You can find out about the Department of Education’s Direct Loan consolidation program by calling 1-800-557-7392 or on-line at http://loanconsolidation.ed.gov.

19. What are the best ways to get out of default?

The most complete solution is to cancel your loan (see # 11 above). The problem is that cancellations are available only in very limited circumstances.

You can renew eligibility, but not necessarily get out of default, by requesting a “reasonable and affordable payment plan” and making six on-time consecutive payments under this plan. It is critical not to enter into a repayment plan that you can’t afford. If you stop making payments after renewing eligibility through a reasonable and affordable repayment plan, you won’t automatically have this option again.

If you make twelve consecutive on-time payments and jump through a few other hoops, you will be eligible to “rehabilitate” your loan. Successful rehabilitation will get you out of default. Loan consolidation (see # 18 above) is another option. Consolidation eliminates the old loans on which you were in default in favor of a new consolidation loan, with new terms and a new payment schedule. However, not all lenders will consolidate defaulted loans. There are limits in both the FFEL and Direct Consolidation loan programs.

In some cases, you can also get out of default by paying a lump sum to the Department of Education or requesting the Department to compromise your loan.

20. Where can I go for more information?

You can find a lot of information on the Department of Education web site, http://www.ed.gov. You can also call the Department of Education toll-free at the Federal Student Aid Information Center, 1-800-4-FED-AID (1-800-433-3243). The number for TTY users is 1-}00-n!0-t 13foYoatcan geouinthrm ioDisbct`consolidation Loan program by calling 1-800-557-7392 (TTY: 1-800-557-7395). If you already have a student loan and are having a problem, you should consider contacting the Student Loan Ombudsman toll-free at 1-877-557-2575 or on-line at http://fsahelp.ed.gov. You should first try to resolve the problem on your own before calling the Ombudsman.

The Department of Education publishes a very useful “Student Guide” with information on all of the various student financial aid programs. The National Consumer Law Center publishes Student Loan Law, a guide for advocates representing clients with student loan problems. See www.consumerlaw.org or call National Consumer Law Center Publications 617-542-9595, ext. 1 for more information. Another useful publication is available through Nolo, “Take Control of Your Student Loan Debt”, (www.nolo.com or call 1-800-728-3555).