As a federal loan servicer, we receive a number of communications from schools stating that a student or parent borrower was not eligible for a Direct Loan disbursement, and asking that a final demand letter be sent to the borrower. A final demand letter requires that the borrower repay the ineligible loan principal, and any accrued interest, in full within 30 days of the date of the letter. If a borrower does not comply with the final demand request, regulations require that the loan be put in default. Most borrowers cannot make that repayment, so default is the common end result.
Default makes the borrower ineligible for Title IV aid, and there is no way for the borrower to rehabilitate or consolidate the loan when the default is due to ineligibility. It may also impact the borrower's credit history. It probably means that you lose the student and the default impacts your default rate. For all these reasons, it's important to make sure we're sending these letters only when they're required by regulation.
When False Information Was Provided
The U.S. Department of Education's (ED) regulation, 34 CFR 682.412, states that when a student or parent borrower provides false information related to Direct Loan eligibility, the borrower is not eligible for the Direct Loan funds. An example would be if, after you?ve made a Direct Loan disbursement, you learn that incorrect income information was provided on the FAFSA, and that it was done in a deliberate attempt to increase aid eligibility. In that situation, if you cannot resolve the matter with the family, you should notify the federal servicer that false information was provided, and that the borrower was not eligible for the loan funds disbursed. The servicer will then send the final demand letter.
When Attendance Issues Impact Eligibility
The regulation also states that if a student or parent borrower received Direct Loan funds for a period of enrollment during which the student never attended, the borrower is ineligible for the loan disbursement. However, 34 CFR 668.21 states that the school is required to return any Direct Loan funds it retained for tuition and fees to ED when a student does not attend at all. You cannot retain Direct Loan funds for a period of non–attendance and put the repayment burden on the borrower. Only the Direct Loan funds you paid directly to the student or parent borrower, possibly as a credit balance, are considered ineligible. You should notify the federal servicer of non–attendance and ineligibility only when the student or parent borrower "pocketed" Direct Loan funds and did not subsequently pay them to the school for tuition and fees. The servicer will then send the final demand letter. Prior to notifying the servicer, however, it can't hurt to contact the student or parent borrower, explain the ineligibility, and provide them the opportunity to return the funds to you, so you can return them to ED.
It is important to remember that the loan regulations, in 34 CFR 682.412, state that the loan disbursement is ineligible if the student "failed to attend school". Unlike for Pell Grant, a student does not have to attend every class to be Direct Loan eligible. A student doesn't even have to attend enough classes to be half–time. A student must just attend school and be enrolled at least half–time. That means that the student who is enrolled half–time on the date of the Direct Loan disbursement is eligible for that disbursement, as long as you can document that he/she attended at least one class in the enrollment period. This is not a situation where you should notify the servicer that the borrower is ineligible, because the combination of attendance and enrollment makes the borrower eligible. We don't want to cause eligible borrowers to go into default.
What to Do When Enrollment Falls Below Half–Time
Simply dropping a class(es) that takes the student's enrollment to below half–time after receiving Direct Loan funds does not make the borrower ineligible or trigger a final demand letter. In that situation, you report the enrollment status change to the National Student Loan Data System, and the servicer will put the loan in grace or repayment because of the drop to less than half–time. Please refer to ED's Dear Colleague Letter GEN-13-02, which provides a helpful explanation of this.
What We Do Matters
Please make sure that financial aid and business office staff at your school understand the loan regulations as they relate to ineligibility and final demand letters. We know you want to do right by your students, and we thank you for all you do.