Before you dive into the details of student loans or start completing loan applications, it may be helpful to get an overview of the loan process.
This section describes the players in the process, how the process works, the implications of signing a promissory note (i.e., your "contract" to borrow money and repay), and how you will receive your money (the loan proceeds).
• The players
• Loan life cycle
• Borrower's contract, promissory notes
• Loan proceeds
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Friday, May 15, 2009
Learning the Loan Process
Before you dive into the details of student loans or start completing loan applications, it may be helpful to get an overview of the loan process.
This section describes the players in the process, how the process works, the implications of signing a promissory note (i.e., your "contract" to borrow money and repay), and how you will receive your money (the loan proceeds).
• The players
• Loan life cycle
• Borrower's contract, promissory notes
• Loan proceeds
This section describes the players in the process, how the process works, the implications of signing a promissory note (i.e., your "contract" to borrow money and repay), and how you will receive your money (the loan proceeds).
• The players
• Loan life cycle
• Borrower's contract, promissory notes
• Loan proceeds
The Players
The federal government? Lenders? Servicers? Who are they and what role do they play in the loan process?
Federal Government
The U.S. Department of Education (the Department) administers the federal student loan programs. As noted below, it also serves as the lender under certain loan programs.
Borrower
You or your parent—the person who receives the student loan and is responsible for repaying the loan.
Lender
Who lends the money for your student loan. Most schools have developed working relationships with single lenders or multiple lenders ("preferred" lenders). Contact each school's financial aid office or Web site for their preferred lender lists.
The following could be a lender:
• Bank
• Savings and loan association
• School
• Credit union
• Pension fund
• Insurance company
• Consumer finance company
• Federal government
Lenders own loans and receive borrower payments. Lenders frequently sell their loans to other parties. If this happens, you will be notified and you will be told who the new owner is.
School
Schools play a major role in the student loan process by:
• Determining financial aid awards which affect the amount students will ultimately need to borrow.
• Making recommendations on lender choice.
• Providing answers to student loan questions.
Guarantor
In the Federal Family Education Loan Program (FFELP), the guarantor is the primary reason that students with no credit histories can receive student loans. A guarantor is a state or private nonprofit agency approved by the Department to guarantee FFELP student loans.
In return for making loans under the FFELP, lenders are guaranteed repayment of most of the loan if they follow all federal guidelines for managing loans. If a borrower defaults on a federal student loan, the loan is turned over to the guarantor. The guarantor reimburses the lender and continues to aggressively pursue the borrower for collection.
The Department is the lender for the William D. Ford Federal Direct Loan Program (FDLP), so guarantors are not required to guarantee FDLP student loans.
Secondary Market
A secondary market is an organization that purchases loans from other lenders. By purchasing loans, they replenish lender funds, which enables lenders to make additional loans to students and parents.
Servicer
Usually, lenders and secondary markets hire companies to manage student loans. These companies are called servicers. A servicer performs tasks on behalf of the lender or secondary market. These activities may include processing loan applications, answering customer service phone calls, processing loan payments, and collecting delinquent accounts.
Credit Bureau
Credit bureaus gather and store credit information on individuals. A credit report is a necessary step when applying for all PLUS loans and most private loans, credit cards, car loans, or home mortgage loans. Credit bureaus are used when a credit report is needed for a loan application.
After you borrow, the lender reports to credit bureaus how much you borrow and whether you are making payments on time. This information is then available to potential employers and creditors.
Finally, note that a single entity might play more than one role in your student loan process. Your lender may also be your servicer. Or, if you're in the FDLP, the federal government may take on the roles of lender and guarantor besides acting as program's administrator and regulator.
Federal Government
The U.S. Department of Education (the Department) administers the federal student loan programs. As noted below, it also serves as the lender under certain loan programs.
Borrower
You or your parent—the person who receives the student loan and is responsible for repaying the loan.
Lender
Who lends the money for your student loan. Most schools have developed working relationships with single lenders or multiple lenders ("preferred" lenders). Contact each school's financial aid office or Web site for their preferred lender lists.
The following could be a lender:
• Bank
• Savings and loan association
• School
• Credit union
• Pension fund
• Insurance company
• Consumer finance company
• Federal government
Lenders own loans and receive borrower payments. Lenders frequently sell their loans to other parties. If this happens, you will be notified and you will be told who the new owner is.
School
Schools play a major role in the student loan process by:
• Determining financial aid awards which affect the amount students will ultimately need to borrow.
• Making recommendations on lender choice.
• Providing answers to student loan questions.
Guarantor
In the Federal Family Education Loan Program (FFELP), the guarantor is the primary reason that students with no credit histories can receive student loans. A guarantor is a state or private nonprofit agency approved by the Department to guarantee FFELP student loans.
In return for making loans under the FFELP, lenders are guaranteed repayment of most of the loan if they follow all federal guidelines for managing loans. If a borrower defaults on a federal student loan, the loan is turned over to the guarantor. The guarantor reimburses the lender and continues to aggressively pursue the borrower for collection.
The Department is the lender for the William D. Ford Federal Direct Loan Program (FDLP), so guarantors are not required to guarantee FDLP student loans.
Secondary Market
A secondary market is an organization that purchases loans from other lenders. By purchasing loans, they replenish lender funds, which enables lenders to make additional loans to students and parents.
Servicer
Usually, lenders and secondary markets hire companies to manage student loans. These companies are called servicers. A servicer performs tasks on behalf of the lender or secondary market. These activities may include processing loan applications, answering customer service phone calls, processing loan payments, and collecting delinquent accounts.
Credit Bureau
Credit bureaus gather and store credit information on individuals. A credit report is a necessary step when applying for all PLUS loans and most private loans, credit cards, car loans, or home mortgage loans. Credit bureaus are used when a credit report is needed for a loan application.
After you borrow, the lender reports to credit bureaus how much you borrow and whether you are making payments on time. This information is then available to potential employers and creditors.
Finally, note that a single entity might play more than one role in your student loan process. Your lender may also be your servicer. Or, if you're in the FDLP, the federal government may take on the roles of lender and guarantor besides acting as program's administrator and regulator.
Thursday, May 14, 2009
Loan Life Cycle
The life cycle of a loan is described below to help you understand the loan process. The life cycle has seven phases and a number of steps in each phase — from applying for financial aid to paying off the loan. For a high school senior, this process could span over 15 years.
The following describes the typical life cycle of a federal student loan.
Phase 1: Identifying Need
Student and parents:
• Complete and submit the Free Application for Federal Student Aid (FAFSA). This form will help determine your eligibility.
• Review the Student Aid Report (SAR). Your SAR will summarize the information you provided on the FAFSA and indicates your Expected Family Contribution (EFC).
• Compare financial aid award letters received from schools.
Phase 2: Loan Application
• Borrower requests loan by submitting a loan application.
• School certifies student eligibility.
• Lender approves borrower loan application.
• In the case of FFELP loans, a guarantor provides guarantee that the loan will be repaid.
Phase 3: Disbursement
• Lender sends loan proceeds to the school by check or electronic funds transfer.
• School may contact borrower for check endorsement.
• School applies loan proceeds to student's outstanding bill and turns over any remaining funds to borrower.
• Under most federal loan programs, loan proceeds are not disbursed to first-year undergraduates who are also first-time borrowers until the student completes the first 30 days of their program of study and participates in entrance counseling.
• Lender sends parent borrower a repayment disclosure statement for Federal PLUS loan.
• Parent borrower with Federal PLUS loans begins repayment after full disbursement. Normally, the first payment is due no later than 60 days after disbursement. However, an in-school deferment may be an option.
• For loans requiring credit, lender notifies credit bureaus that loan proceeds have been disbursed.
Phase 4: In School
• Student attends school. Student borrower is not required to make federal loan payments during this time.
• Under some federal loan programs, accrued interest on loan during this period is paid by the federal government (interest subsidy).
• Under other programs, the borrower is responsible for paying the interest that accrues while the student is in school. If the borrower does not make interest payments, it is added to the loan balance
• Student borrowers who have Federal Stafford or Federal Perkins loans are considered "in-school" unless they are enrolled less than half-time, graduate, or withdraw.
• Parent borrowers with one or more Federal PLUS loans do not have an "in-school" phase.
Phase 5: Grace Period
• Student graduates, enrolls for less than half time, or withdraws.
• Student borrower receives a "grace period" of 6-9 months (depending on the type of federal loan) before repayment of any federal loan begins.
• Parent borrowers do not receive a "grace period" with Federal PLUS loans. Borrowers of private loans may or may not receive a "grace period."
• Lender sends student borrower a repayment disclosure statement detailing the date payments must start, monthly payment amount, number of payments, and interest rate for the student loan(s).
Phase 6: Repayment
• Student begins repaying Federal Stafford or Federal Perkins loans when the grace period ends.
• Parent begins repaying Federal PLUS loans immediately after full disbursement and must make initial payment within 60 days of disbursement.
• Student and/or parent begin repaying private loans according to the terms of the loan.
• For federal loans, you may switch from one repayment plan to another once a year as long as the maximum loan term for the new plan is longer than the amount of time left under the current plan.
Phase 7: Paid in Full
• Borrower makes final loan payment.
• Lender sends notice to borrower confirming loan is paid in full.
• Lender notifies credit bureaus that borrower has fully repaid the loan.
The following describes the typical life cycle of a federal student loan.
Phase 1: Identifying Need
Student and parents:
• Complete and submit the Free Application for Federal Student Aid (FAFSA). This form will help determine your eligibility.
• Review the Student Aid Report (SAR). Your SAR will summarize the information you provided on the FAFSA and indicates your Expected Family Contribution (EFC).
• Compare financial aid award letters received from schools.
Phase 2: Loan Application
• Borrower requests loan by submitting a loan application.
• School certifies student eligibility.
• Lender approves borrower loan application.
• In the case of FFELP loans, a guarantor provides guarantee that the loan will be repaid.
Phase 3: Disbursement
• Lender sends loan proceeds to the school by check or electronic funds transfer.
• School may contact borrower for check endorsement.
• School applies loan proceeds to student's outstanding bill and turns over any remaining funds to borrower.
• Under most federal loan programs, loan proceeds are not disbursed to first-year undergraduates who are also first-time borrowers until the student completes the first 30 days of their program of study and participates in entrance counseling.
• Lender sends parent borrower a repayment disclosure statement for Federal PLUS loan.
• Parent borrower with Federal PLUS loans begins repayment after full disbursement. Normally, the first payment is due no later than 60 days after disbursement. However, an in-school deferment may be an option.
• For loans requiring credit, lender notifies credit bureaus that loan proceeds have been disbursed.
Phase 4: In School
• Student attends school. Student borrower is not required to make federal loan payments during this time.
• Under some federal loan programs, accrued interest on loan during this period is paid by the federal government (interest subsidy).
• Under other programs, the borrower is responsible for paying the interest that accrues while the student is in school. If the borrower does not make interest payments, it is added to the loan balance
• Student borrowers who have Federal Stafford or Federal Perkins loans are considered "in-school" unless they are enrolled less than half-time, graduate, or withdraw.
• Parent borrowers with one or more Federal PLUS loans do not have an "in-school" phase.
Phase 5: Grace Period
• Student graduates, enrolls for less than half time, or withdraws.
• Student borrower receives a "grace period" of 6-9 months (depending on the type of federal loan) before repayment of any federal loan begins.
• Parent borrowers do not receive a "grace period" with Federal PLUS loans. Borrowers of private loans may or may not receive a "grace period."
• Lender sends student borrower a repayment disclosure statement detailing the date payments must start, monthly payment amount, number of payments, and interest rate for the student loan(s).
Phase 6: Repayment
• Student begins repaying Federal Stafford or Federal Perkins loans when the grace period ends.
• Parent begins repaying Federal PLUS loans immediately after full disbursement and must make initial payment within 60 days of disbursement.
• Student and/or parent begin repaying private loans according to the terms of the loan.
• For federal loans, you may switch from one repayment plan to another once a year as long as the maximum loan term for the new plan is longer than the amount of time left under the current plan.
Phase 7: Paid in Full
• Borrower makes final loan payment.
• Lender sends notice to borrower confirming loan is paid in full.
• Lender notifies credit bureaus that borrower has fully repaid the loan.
Promissory Notes (Borrower's Contract)
When you take out a loan, you must sign a contract with the lender confirming an understanding of the loan and how it is to be repaid. This contract is called a "promissory note" and is used for most loan types, including student loans, car loans, and home mortgages.
Your Promise to Repay
Simply put, a promissory note is your promise to repay the loan under the terms detailed within it. Because the promissory note is a legal document, you should read it very carefully and make sure you understand all the information before you sign.
The details will include the terms and conditions under which the loan is made as well as your rights and responsibilities as the borrower. If there are errors on the promissory note, contact your lender before signing it.
A promissory note for a student loan is also an agreement between the borrower, the lender, and the school that authorizes the school to credit the funds to the student's account, to use the borrower's Social Security number, to report to credit bureaus, and to share information about the loan.
Master Promissory Note (MPN)
The MPN covers multiple Federal Stafford or PLUS loans at any participating four-year or graduate school with the following exceptions:
• The student's education lasts longer than 10 years.
• You change lenders, which requires a new MPN.
• The student changes schools, which may require a new MPN.
The difference between the MPN and any other promissory note is that you may have to sign only one "master" note for your Stafford or PLUS loan borrowing. Previously, you would have signed a note for each academic year in which you received Stafford and PLUS loans.
Schools also have the option of having students and parents complete and sign an electronic promissory note. Usually, the promissory note will be completed through a website, and the organization operating the site will be responsible for authenticating the electronic signatures.
Other Benefits of Signing the MPN
The MPN helps you in a number of ways.
• It simplifies the loan application and promissory note process.
• It reduces paper requirements.
• It provides faster turnaround time when the multi-year feature is used because you won't have to sign a new promissory note each time you need additional money.
• It increases the chance that one company will hold all of your loans. That means you will have one place to send loan payments.
Expiration Date
Your MPN will expire if:
• You tell your lender in writing to terminate the note's use for future loans.
• Your MPN note is 10 years old (it's 10 years after the date you signed the MPN).
• The first loan disbursement is not made within 12 months after you signed your note.
Signing a new MPN
Here are some of the reasons you might sign a new MPN.
• You want to change lenders. (A new MPN is required because the MPN is a contract between you and a specific lender.)
• The student does not complete his or her studies within 10 years. After 10 years, borrowers must sign a new MPN.
• Your school is not eligible to participate in the multiple-loan process, so you must sign a new MPN for each new loan you receive.
• Your lender transferred the right to make further loans to another lender, and you wish to obtain future loans from a lender other than the lender listed on your MPN.
• You wish to opt out of the multiple-loan feature of the MPN and sign a new note for each new loan that you secure.
Your Promise to Repay
Simply put, a promissory note is your promise to repay the loan under the terms detailed within it. Because the promissory note is a legal document, you should read it very carefully and make sure you understand all the information before you sign.
The details will include the terms and conditions under which the loan is made as well as your rights and responsibilities as the borrower. If there are errors on the promissory note, contact your lender before signing it.
A promissory note for a student loan is also an agreement between the borrower, the lender, and the school that authorizes the school to credit the funds to the student's account, to use the borrower's Social Security number, to report to credit bureaus, and to share information about the loan.
Master Promissory Note (MPN)
The MPN covers multiple Federal Stafford or PLUS loans at any participating four-year or graduate school with the following exceptions:
• The student's education lasts longer than 10 years.
• You change lenders, which requires a new MPN.
• The student changes schools, which may require a new MPN.
The difference between the MPN and any other promissory note is that you may have to sign only one "master" note for your Stafford or PLUS loan borrowing. Previously, you would have signed a note for each academic year in which you received Stafford and PLUS loans.
Schools also have the option of having students and parents complete and sign an electronic promissory note. Usually, the promissory note will be completed through a website, and the organization operating the site will be responsible for authenticating the electronic signatures.
Other Benefits of Signing the MPN
The MPN helps you in a number of ways.
• It simplifies the loan application and promissory note process.
• It reduces paper requirements.
• It provides faster turnaround time when the multi-year feature is used because you won't have to sign a new promissory note each time you need additional money.
• It increases the chance that one company will hold all of your loans. That means you will have one place to send loan payments.
Expiration Date
Your MPN will expire if:
• You tell your lender in writing to terminate the note's use for future loans.
• Your MPN note is 10 years old (it's 10 years after the date you signed the MPN).
• The first loan disbursement is not made within 12 months after you signed your note.
Signing a new MPN
Here are some of the reasons you might sign a new MPN.
• You want to change lenders. (A new MPN is required because the MPN is a contract between you and a specific lender.)
• The student does not complete his or her studies within 10 years. After 10 years, borrowers must sign a new MPN.
• Your school is not eligible to participate in the multiple-loan process, so you must sign a new MPN for each new loan you receive.
• Your lender transferred the right to make further loans to another lender, and you wish to obtain future loans from a lender other than the lender listed on your MPN.
• You wish to opt out of the multiple-loan feature of the MPN and sign a new note for each new loan that you secure.
Loan Proceeds
You've applied for the loan, it's been approved, and you've signed the promissory note. What’s next?
Where is the money?
The money doesn’t come directly to you. Rather, the proceeds are sent to the school, either by check or electronic funds transfer.
Then the school applies the funds to the outstanding balance on your school account, which typically includes your bill for tuition, fees, room, board, and other school charges.
Once those costs are paid, you'll receive any remaining proceeds to cover other expenses.
When is the money sent?
Funds will not be disbursed until you enroll and, even then, the money will not arrive all at once. Lenders send money in installments—called disbursements—based on academic periods.
The timing of disbursements will vary from school to school and by loan program. Under most federal loan programs, loan proceeds to first-year undergraduates who are also first-time borrowers can't be disbursed by lenders or credited to student accounts until 30 days after enrollment.
Check with your financial aid office to learn your school's policy so you're not surprised
Where is the money?
The money doesn’t come directly to you. Rather, the proceeds are sent to the school, either by check or electronic funds transfer.
Then the school applies the funds to the outstanding balance on your school account, which typically includes your bill for tuition, fees, room, board, and other school charges.
Once those costs are paid, you'll receive any remaining proceeds to cover other expenses.
When is the money sent?
Funds will not be disbursed until you enroll and, even then, the money will not arrive all at once. Lenders send money in installments—called disbursements—based on academic periods.
The timing of disbursements will vary from school to school and by loan program. Under most federal loan programs, loan proceeds to first-year undergraduates who are also first-time borrowers can't be disbursed by lenders or credited to student accounts until 30 days after enrollment.
Check with your financial aid office to learn your school's policy so you're not surprised
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