Federal Student Financial Assistance: 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 non-citizen. In addition, you must have a valid Social Security number and register with the Selective Service if required. Also, your eligibility for federal student aid is suspended 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. You may also be able to meet the “ability to benefit” standard by completing a minimum level of coursework at the institution of higher education.

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. 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. The government pays while the borrower is in school and during grace and deferment periods.

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. (PLUS loans are also available for graduate and professional students.)

5. What Are the Different Types of Student Loans and What’s the Difference Between Them?

As of July 1, 2010, nearly all federal loans will be made by the government through the Direct Loans program. The Family Education Loan program (FFEL) is eliminated as of this date. FFEL loans were made by private lenders and guaranteed by the government.

Perkins loans are still being made. These 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.

These are the main federal financial loan programs. There are also federal grant programs, such as the Federal Pell Grant Program, as well as many state financial assistance programs. In addition, there are many 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. PLUS loans generally must be paid back within sixty days after the final loan disbursement. However, since July 1, 2008, student PLUS loan borrowers can defer repayment until six months after school. Parent PLUS loan borrowers with these loans can defer repayment while the student on whose behalf the loan was taken is in school and for six months after school. Parents must request this deferment. Because PLUS loans are unsubsidized, interest will accrue during the deferment period.

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 fourteen 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% of the payment period or period of enrollment, you earned 30% of the assistance you were originally scheduled to receive. Once you’ve completed more than 60% 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 ninety days of when you withdrew (see question # 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 ten-year repayment plan. Both the FFEL and Direct Loan programs have payment plan options for low-income borrowers. Since July 1, 2009, both programs offer income-based repayment to eligible borrowers. The Direct Loan program also has a separate income-contingent repayment plan (ICRP) and the FFEL program has a separate 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 should be able to 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;

* economic hardship deferments, granted one year at a time for a maximum of three years; or

* Military service and post-active-duty deferments.

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. There are other grounds for false certification cancellations, including if your loan was forged or if you were a victim of identity theft);

* Borrower’s permanent and total disability;

* Borrower’s death;

* Unpaid refund (partial or full cancellation if the school failed to pay a refund owed);

* Public service cancellations for borrowers with Direct Loans who have balances remaining after ten years of repayment; or

* 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 website (www.ed.gov) or by calling the Federal Student Aid Line, 1-800-4-FED-AID. The forms are also reprinted in the National Consumer Law Center’s publication, Student Loan Law (4th ed. 2010).

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:

* 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.

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 federal 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 (4th ed. 2010). This heightened standard applies to both federal and private loans.

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. As of July 1, 2010, all government consolidation loans will be made through the Direct Loan Program. You can find out about the Department of Education’s Direct Loan consolidation program by calling 1-800-557-7392 or going on-line at www.loanconsolidation.ed.gov.

19. What Are the Best Ways to Get Out of Default?

The most complete solution is to cancel your loan (see question # 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 nine consecutive on-time payments in a ten-month period and jump through a few other hoops, you will be eligible to “rehabilitate” your loan. Successful rehabilitation will get you out of default. You are allowed only one rehabilitation per loan.

Loan consolidation (see question # 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. There are some limits to how many times you can consolidate as a way out of default.

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 National Consumer Law Center’s Student Loan Borrower Assistance Project’s website at www.studentloanborrowerassistance.org. The Department of Education’s website is at 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 1-800-730-8913. You can get information about the Direct 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://ombudsman.ed.gov. You should first try to resolve the problem on your own before calling the Ombudsman.

The Department of Education publishes very useful guides, including Funding Education Beyond High School and Repaying Your Student Loans. These guides are available on the Department’s website at www.ed.gov. The National Consumer Law Center publishes Student Loan Law (4th ed. 2010), a guide for advocates representing clients with student loan problems. See www.consumerlaw.org or call National Consumer Law Center Publications 617-542-9595, extension 1, for more information.