The William Federal Student Loans Made Through the June 21, 2021 William D. Ford Federal Direct Loan Program: Alexandra Hegji Terms and Conditions for Borrowers Analyst in Social Policy The Wil iam D. Ford Federal Direct Loan (Direct Loan) program is the single largest source of federal financial assistance to support students'’ postsecondary educational pursuits. The U.S. Department of Education estimates that in FY2020, $100.2 billionFY2022, $91.3 bil ion in in new loans will wil be made through the program. As of the end of the secondfourth quarter of FY2019, $1.2 trillionFY2020, $1.3 tril ion in principal and interest on Direct Loan program loans, borrowed by or on behalf of 34.5 million35.9 mil ion individuals, remained outstanding.

For many individuals, borrowing a federal student loan through the Direct Loan program may be among their first experiences in incurring a major financial obligation. Upon obtaining a loan, a borrower assumes a contractual obligation to repay the debt over a period that may span a decade or more.

Loans were first made through the Direct Loan program in 1994. Since then, Congress has periodicallyperiodical y made changes to the program and the terms and conditions of loans. Changes have impacted program aspects such as the availability of loan types, interest rates, loan repayment, loan discharge and forgiveness, and the consequences of default. Over time, the accumulation of changes—many of which are differentiallydifferential y applicable to borrowers or loan types—has resulted in a set of loan terms and conditions that are voluminous and complex. Congress may contemplate making future changes to loan terms and conditions.

This report has been prepared to provide Congress with a comprehensive description of the terms and conditions and borrower benefits that are applicable to loans made through the Direct Loan program. Emphasis is placed on discussing loan types, provisions related to borrower eligibility, amounts that may be borrowed, interest and fees, loan repayment, repayment relief, loan forgiveness benefits, the consequences of default, and the methods used to ensure borrowers are informed about the terms and conditions of their loans and their obligation to repay them.

Direct Loan Types

Four types of loans are available through the Direct Loan program. Direct Subsidized Loans are available only to undergraduate students with financial need. Direct Unsubsidized Loans are available both to undergraduate students and graduate students. Direct PLUS Loans may be borrowed by graduate students and by the parents of undergraduate students dependent upon them for financial support. Direct Consolidation Loans allow al ow borrowers to combine debt from multiple existing federal student loans into a single new loan.

Eligibility and Amounts That May Be Borrowed

Whether an individual may borrow a loan and the amount he or she may borrow are determined by the interaction of many factors. Eligibility to borrow varies by loan type, borrower characteristics, program level, and class level. The amount an individual may borrow is subject to annual and aggregate borrowing limits, and federal need analysis and packaging procedures. Loans are made available in amounts constrained by program rules, but—with the exception of Direct PLUS Loans—without consideration of a borrower'’s ability to repay. Eligibility to borrow a Direct PLUS Loan depends on an individual'’s creditworthiness.

Interest on Direct Loan Program Loans

Loans Procedures for calculating interest vary by loan type, repayment status, and the period during which a loan was made. In limited circumstances, the federal government subsidizes, or does not charge, interest that would otherwise accrue. Interest subsidies are mostly limited to Direct Subsidized Loans; however, certain interest subsidies may be provided on all al loan types.

Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Loan Repayment Plans Loan Repayment Plans

Numerous repayment plans, each with different payment structures and maximum durations, are available. Among the various plans, income-driven repayment (IDR) plans cap monthly payments at a specific percentage of a borrower'’s discretionary income. For most repayment plans, monthly payments must cover the interest that accrues; however, the IDR plans allowal ow for negative amortization, in which case monthly payments may be for less than the interest that accrues.

Deferment and Forbearance

Periods of deferment and forbearance offer a borrower temporary relief from the obligation to make monthly payments. In certain instances, interest subsidies may be provided during periods of deferment; however, with limited exceptions, interest subsidies are not available during periods of forbearance.

Loan Discharge and Loan Forgiveness

Forgiveness A borrower may be relieved of the obligation to repay his or her loans in certain circumstances. Student loan debt may be discharged on the basis of borrower hardship (e.g., death, total and permanent disability, school closure) or may be forgiven following an extended period of repayment according to an IDR plan or completion of a period of public service.

Loan Default, Its Consequences, and Resolution

If a borrower defaults, the loan becomes due in full and the borrower loses eligibility for many benefits, as well wel as access to other forms of federal student aid. The government also uses numerous means to collect on defaulted student loan debt. A limited set of options is available for a borrower to bring a defaulted loan back into good standing.

Loan Counseling and Disclosures

Student borrowers are required to undergo financial counseling, which is designed to provide them with comprehensive information on the terms and conditions of their loans as well wel as their rights and the responsibilities they assume as borrowers. Loan terms and conditions are specified in a promissory note, which is a contract that establishes the borrower'’s obligation to repay the loan, and in a plain language disclosure document that uses simplified terms to explain a loan'’s terms and conditions and the borrower'’s rights and responsibilities.

The William Congressional Research Service link to page 7 link to page 8 link to page 10 link to page 11 link to page 12 link to page 12 link to page 13 link to page 14 link to page 15 link to page 15 link to page 16 link to page 17 link to page 18 link to page 19 link to page 19 link to page 20 link to page 22 link to page 24 link to page 24 link to page 25 link to page 27 link to page 28 link to page 29 link to page 29 link to page 30 link to page 30 link to page 31 link to page 31 link to page 31 link to page 32 link to page 32 link to page 32 link to page 33 link to page 34 link to page 35 link to page 35 link to page 35 link to page 36 link to page 43 link to page 44 link to page 45 link to page 46 link to page 60 link to page 61 link to page 62 link to page 63 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Contents Introduction ................................................................................................................... 1 Background on the Direct Loan Program ............................................................................ 2 Direct Loan Types ........................................................................................................... 4 Eligibility and Amounts That May Be Borrowed .................................................................. 5 Factors Affecting Eligibility to Borrow ......................................................................... 6 General Student-Based Eligibility Criteria................................................................ 6 Student Dependency Status .................................................................................... 7 Program Level ..................................................................................................... 8 Undergraduate Class Level .................................................................................... 9 Financial Need..................................................................................................... 9 Direct Subsidized Loan Limitations for Post-July 1, 2013, First-Time Borrowers ......... 10 Eligibility Requirements for Direct PLUS Loans ..................................................... 11 Eligibility Requirements for Direct Consolidation Loans .......................................... 12 Amounts That May Be Borrowed............................................................................... 13 Annual Loan Limits ............................................................................................ 13 Aggregate Loan Limits........................................................................................ 14 Limits on Borrowing Determined by Need Analysis and Packaging ........................... 16 Interest on Direct Loan Program Loans ............................................................................ 18 Interest Rates .......................................................................................................... 18 Procedures for Set ing Student Loan Interest Rates .................................................. 19 Interest Accrual ....................................................................................................... 21 Subsidized Interest................................................................................................... 22 Interest Subsidy on Direct Subsidized Loans .......................................................... 23 Interest Rate Reduction for Automatic Debit Repayment .......................................... 23 Interest Subsidies on Eligible Loans Repaid According to Certain Income-Driven Repayment (IDR) Plans During Negative Amortization ......................................... 24 No Accrual of Interest on Loans of Certain Active Duty Servicemembers ................... 25 SCRA 6% Interest Rate Cap on Loans of Borrowers Who Enter Military Service ......... 25 Interest Subsidy on Al Loan Types During Cancer Treatment Deferment.................... 25 No Accrual of Interest During COVID-19 .............................................................. 26 Deferred Payment of Accrued Interest......................................................................... 26 Interest Capitalization .............................................................................................. 26 Limit on Interest Capitalization in the IDR and Alternative Repayment Plans .............. 27 Loan Origination Fees ................................................................................................... 28 Loan Repayment ........................................................................................................... 29 Grace Period ........................................................................................................... 29 Loan Repayment Period ........................................................................................... 29 Loan Repayment Plans ............................................................................................. 30 Standard Repayment Plans................................................................................... 37 Extended Repayment Plans .................................................................................. 38 Graduated Repayment Plans ................................................................................ 39 Income-Driven Repayment (IDR) Plans................................................................. 40 Alternative Repayment Plans ............................................................................... 54 Prepayment ............................................................................................................ 55 Application of Payments on Delinquent Loans ............................................................. 56 Deferment and Forbearance ............................................................................................ 57 Congressional Research Service link to page 63 link to page 64 link to page 65 link to page 65 link to page 65 link to page 66 link to page 66 link to page 67 link to page 67 link to page 68 link to page 68 link to page 68 link to page 69 link to page 70 link to page 70 link to page 70 link to page 71 link to page 71 link to page 71 link to page 71 link to page 72 link to page 72 link to page 74 link to page 75 link to page 75 link to page 76 link to page 77 link to page 77 link to page 77 link to page 78 link to page 78 link to page 80 link to page 82 link to page 82 link to page 84 link to page 84 link to page 84 link to page 86 link to page 86 link to page 87 link to page 88 link to page 89 link to page 90 link to page 91 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Deferments ............................................................................................................. 57 In-School Deferment........................................................................................... 58 Graduate Fel owship Deferment ........................................................................... 59 Rehabilitation Training Program Deferment ........................................................... 59 Unemployment Deferment................................................................................... 59 Economic Hardship Deferment............................................................................. 60 Military Service Deferment.................................................................................. 60 Post-Active Duty Student Deferment..................................................................... 61 Cancer Treatment Deferment................................................................................ 61 Forbearance ............................................................................................................ 62 General (Discretionary) Forbearance ..................................................................... 62 Administrative Forbearance ................................................................................. 62 Medical or Dental Internship or Residency Forbearance ........................................... 63 AmeriCorps National Service Forbearance ............................................................. 64 Teacher Loan Forgiveness Program Forbearance ..................................................... 64 Student Loan Debt Burden Forbearance ................................................................. 64 National Guard Duty Forbearance ......................................................................... 65 Department of Defense Student Loan Repayment Program Forbearance ..................... 65 Loan Discharge and Loan Forgiveness ............................................................................. 65 Loan Discharge for Borrower Hardship....................................................................... 65 Discharge Due to Death....................................................................................... 66 Total and Permanent Disability Discharge .............................................................. 66 Closed School Discharge ..................................................................................... 68 False Certification and Unauthorized Payment Discharges ........................................ 69 Unpaid Refund Discharge .................................................................................... 69 Borrower Defense to Repayment Discharge............................................................ 70 Bankruptcy Discharge ......................................................................................... 71 Loan Forgiveness Following IDR Plan Repayment ....................................................... 71 Loan Forgiveness for Public Service........................................................................... 71 Teacher Loan Forgiveness Program ....................................................................... 72 Public Service Loan Forgiveness (PSLF) Program................................................... 72 Tax Treatment of Discharged and Forgiven Debt .......................................................... 74 Loan Default, Its Consequences, and Resolution ................................................................ 76 Consequences of Default for Borrowers ...................................................................... 76 COVID-19 Collection Suspension ........................................................................ 78 Resolution of Default ............................................................................................... 78 Loan Rehabilitation ............................................................................................ 78 Loan Consolidation ............................................................................................ 80 Loan Counseling and Disclosures .................................................................................... 80 Entrance Counseling ................................................................................................ 81 PLUS Loan Credit Counseling For Borrowers with Adverse Credit ................................. 82 Master Promissory Note and Plain Language Disclosure................................................ 83 Exit Counseling....................................................................................................... 84 Additional Information on Loan Terms and Conditions.................................................. 85 Congressional Research Service link to page 20 link to page 20 link to page 27 link to page 27 link to page 34 link to page 34 link to page 37 link to page 37 link to page 37 link to page 43 link to page 43 link to page 45 link to page 47 link to page 47 link to page 97 link to page 97 link to page 102 link to page 102 link to page 104 link to page 105 link to page 114 link to page 92 link to page 93 link to page 97 link to page 115 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Tables Table 1. Annual and Aggregate Loan Limits, by Borrower Type and Program Level: July 1, 2012, to Present ...................................................................................................... 14 Table 2. Interest Rates on Loans Made Through the Direct Loan Program: July 1, 2020, through June 30, 2021, and July 1, 2021, through June 30, 2022 ........................................ 21 Table 3. Origination Fees on Loans Made Through the Direct Loan Program, FY2021 and FY2022 .................................................................................................................... 28 Table 4. Selected Characteristics of Loan Repayment Plans General y Available to Borrowers: Standard Repayment Plans, Extended Repayment Plans, Graduated Repayment Plans, and Income-Driven Repayment Plans .................................................. 31 Table 5. Repayment Periods: Standard Repayment Plan for Direct Consolidation Loans and Graduated Repayment Plan for Direct Consolidation Loans ........................................ 37 Table 6. Repayment Periods: Extended Repayment Plan and Graduated Repayment Plan ........ 39 Table 7. 2021Poverty Guidelines for the 48 Contiguous States and the District of Columbia ................................................................................................... 41 Table C-1. History of Annual and Aggregate Loan Limits for Direct Loan program loans, by Borrower Type and Academic Level ......................................................................... 91 Table C-2. History of Interest Rate Formulas for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans ................................................................. 96 Table C-3. History of Interest Rate Formulas for Direct Consolidation Loans ......................... 98 Table C-4. History of Interest Rates in Effect for Direct Loan program loans .......................... 99 Table C-5. History of Direct Loan Origination Fees .......................................................... 108 Appendixes Appendix A. Directory of Resources ................................................................................ 86 Appendix B. Glossary of Terms....................................................................................... 87 Appendix C. Historical Tables on Selected Loan Terms and Conditions ................................. 91 Contacts Author Information ..................................................................................................... 109 Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Introduction The Wil iam D. Ford Federal Direct Loan (Direct Loan) program makes several types of federal student loans available to individuals to assist them with financing postsecondary education expenses. It represents the single largest source of federal financial assistance to support students' ’ postsecondary educational pursuits. The U.S. Department of Education (ED) estimates that in FY2020, 15.9 million FY2022, 13.8 mil ion new loans, averaging $6,299632 each and totaling $100.2 billion, will 91.3 bil ion, wil be made through the Direct Loan programprogram to undergraduate and graduate students, and to the parents of undergraduate students.¹1 In addition, ED estimates that 755636,000 Direct Consolidation Loans, averaging $61,43362,063 each and totaling $46.4 billion, will 39.5 bil ion, wil be made to existing borrowers of federal student loans.²2 As of the end of the secondfourth quarter of FY2019, $1.2 trillionFY2020, $1.3 tril ion in principal and interest on Direct Loan program loans, borrowed by or on behalf of 34.5 million individuals, remained outstanding.³

35.9 mil ion individuals, remained outstanding.3 This report presents a comprehensive overview of the terms and conditions that apply to federal student loans made through the Direct Loan program.⁴4 It begins by providing background information on the history of the Direct Loan program. This is followed by a brief description of the various types of loans that are offered through the program. The report then presents a thorough description of the terms and conditions for loans made through the Direct Loan program. In identifying and describing loan terms and conditions, it focuses on provisions applicable to loans that are currently being made or that have been made in recent years. Emphasis is placed on discussing Direct Loan program provisions that are related to borrower eligibility, amounts that may be borrowed, interest rates and fees, procedures for loan repayment, repayment relief, the availability of loan discharge and loan forgiveness benefits, and the consequences of defaulting. The final section of the report provides a summary of the methods that are used to ensure that borrowers are informed about the terms and conditions of the loans they obtain and their obligation to repay them.

This report has been prepared as a resource for Members of Congress, congressional committees, and congressional staff to support them in their legislative, oversight, and representational roles related to federal student loan policy. It is intended to provide a thorough, but nonexhaustive, description of loan terms and conditions and borrower benefits. It is not intended to be relied 1 U.S. Department of Education, FY2022 Justification of Appropriation Estimates to the Congress, Volume II, “Student Loans Overview,” May 26, 2020, p. R-26, https://www2.ed.gov/about/overview/budget/budget22/justifications/r-sloverview.pdf. In some instances, more than one loan will be borrowed by a student or on the student’s behalf. 2 Ibid. 3 U.S. Department of Education, Office of Federal Student Aid, Federal Student Aid Data Center, “ Federal Student Aid Portfolio Summary,” FY2020 Q4, https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/PortfolioSummary.xls. 4 T his report focuses on describing the terms and conditions of federal student loans made through the Direct Loan program as specified by the Higher Education Act of 1965 (HEA) and other laws, and their implementing regulations. In addition to the generally applicable loan terms and conditions that are summ arized in this report, the Higher Education Relief Opportunities for Students (HEROES) Act authorizes a number of waivers and regulatory flexibilities that may be used to extend benefits to certain classes of borrowers. T he waivers and flexibilities made a vailable by the HEROES Act are beyond the scope of this report. For additional information, see CRS Report R42881, Education-Related Regulatory Flexibilities, Waivers, and Federal Assistance in Response to Disasters and National Em ergencies. Additionally, in response to the current COVID-19 pandemic, Congress and the Administration provided additional student loan relief measures to Direct Loan program borrowers. For additional information, see CRS Report R46314, Federal Student Loan Debt Relief in the Context of COVID-19. Congressional Research Service 1 link to page 92 link to page 93 link to page 97 link to page 93 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program description of loan terms and conditions and borrower benefits. It is not intended to be relied upon by borrowers as a resource for validating individual eligibility eligibility for specific borrower benefits.

benefits. Appendix A to this report contains a directory of resources from which additional information may be obtained about loans made available through the Direct Loan program. Appendix B consists of a glossary of terms.⁵ Appendix C contains a set of tables that present historical information on borrowing limits, interest rates, and fees that have applied to loans made through the Direct Loan program.

Background on the Direct Loan Program

The Direct Loan program is authorized under Title IV, Part D of the Higher Education Act of 1965 (HEA; P.L. 89-329, as amended). It was established by the Student Loan Reform Act of 1993 (SLRA), Title IV of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).⁶).6 Federal student loans were first made through the Direct Loan program in 1994.

In the Direct Loan program, loans are made by the government using federal capital (i.e., funds from the U.S. Treasury), and once made, outstanding loans constitute an asset of the federal government. Some important characteristics of loans made through the Direct Loan program are that the federal government assumes the risk for losses that may occur as a result of borrower default, and that it pays for the discharge of loans in cases of borrower death, total and permanent disability, and other limited instances. The federal government also assumes the cost of loans that are not required to be paid in full due to borrowers satisfying criteria that make them eligible to have a portion or all al of the balance of their loans discharged under any of several loan forgiveness programs. For federal budgeting purposes, the program is classified as a direct loan program, which is a type of federal credit program for which mandatory spending authority is provided.⁷

ED'7 ED’s Office of Federal Student Aid (FSA) is the primary entity tasked with administering the Direct Loan program. The institutions of higher education (IHEs) that participate in the Direct Loan program originate loans to borrowers through FSA'’s Common Origination and Disbursement (COD) system. Contractors hired by ED service and collect on the program's loans.⁸

’s loans.8 When the Direct Loan program was first established, it was intended gradually to expand gradually and then ultimately fully fully replace the Federal Family Education Loan (FFEL) program, a guaranteed student loan program authorized under Title IV, Part B of the HEA, and through which most federal student loans were being made.⁹9 The FFEL program had descended from the Guaranteed 5 In the process of describing loans made through the Direct Loan program, numerous terms with precise meanings are used. When some of these terms are introduced, it is not always practical to fully describe or define the term, as a subsequent section in the report may be better suited to providing a detailed description. Definitions for selected terms are presented in the Glossary in Appe ndix B. 6 A Federal Direct Loan Demonstration Program was enacted under the Education Amendments of 1992 ( P.L. 102-325); however, prior to being fully implemented, the demonstration program was succeeded by the Direct Loan program that was enacted under P.L. 103-66. 7 Federal credit may be extended in the form of a direct loan or a loan guarantee. For additional information, see CRS Report R42632, Budgetary Treatm ent of Federal Credit (Direct Loans and Loan Guarantees): Concepts, History, and Issues for Congress, archived. 8 For more detailed information on the administration of the Direct Loan program, see CRS Report R44845, Adm inistration of the William D. Ford Federal Direct Loan Progra m . 9 At the time the Direct Loan program was established, federal student loans were also being made through the Federal Perkins Loan program, authorized by HEA, T itle IV, Part E, and through several smaller health education loan Congressional Research Service 2 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program The FFEL program had descended from the Guaranteed Student Loan (GSL) program, which was enacted under Title IV of the HEA in 1965 to enhance access to postsecondary education for students from low- and middle-income families by providing them access to low-interest federal student loans. In the FFEL program, loan capital was provided by private lenders who also originated and serviced loans. The federal government guaranteed lenders against loss due to factors such as borrower default, death, total and permanent disability, and in limited instances, bankruptcy. State and nonprofit guaranty agencies administered the federal guarantee. The federal government was also responsible for making several different types of payments to lenders and guaranty agencies to support the operation of the program. The FFEL program was administratively complex and the Direct Loan program was established with the aims of streamlining the federal student loan delivery system and achieving cost savings.¹⁰

10 Several years into the implementation of the Direct Loan program, statutory provisions specifying that it ultimately succeed the FFEL program were repealed by the Higher Education Amendments of 1998 (P.L. 105-244).¹¹).11 From 1994 to 2010, the Direct Loan program and the FFEL program operated side-by-side. During this period, IHEs could elect to participate in the program of their choice. As this decision was made at the institutional level, the program through which an individual individual could borrow federal student loans was dependent upon the program participation decisions made by the institution a student attended.

During the period while loans were being made through both the FFEL and Direct Loan programs, from the perspective of the borrower, the terms and conditions of loans offered through the programs were similar in most respects. However, the degree of similarity varied over time. Notable differences included certain characteristics of the repayment plans offered and, beginning in 2008, the availability of the Public Service Loan Forgiveness (PSLF) program only to borrowers of loans made through the Direct Loan program.¹²

12 The authority to make loans through the FFEL program was terminated, effective July 1, 2010, by the SAFRA Act, Title II of the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152).¹³).13 While loans are no longer being made through the FFEL program, as of the end of the second quarter of FY2019, $271.6 billion programs authorized under the Public Health Services Act (PHSA). T hese other loan programs are beyond the scope of this report. For additional information on the loan programs authorized under the PHSA, see CRS Report R46720, Student Loan Program s Authorized by the Public Health Service Act: An Overview. 10 See CRS Report 95-110 EPW, The Federal Direct Student Loan Program , October 16, 1996 (available to congressional clients upon request). 11 During the early years of implementation of the Direct Loan program, concerns were raised about the capacit y of ED to transition from overseeing lending through the FFEL guaranteed loan program to lending completely through the Direct Loan program. For additional information, see U.S. Congress, Senate Committee on Labor and Human Resources, Subcommittee on Education, Arts and Humanities, Oversight of the Direct Student Loan Program , 104th Cong., 1st sess., March 30, 1995, S.Hrg. 104-28 (Washington: GPO, 1995). 12 When the PSLF program was enacted, it was made available only through the Direct Loan program, with the expectation that it would encourage increased borrowing through the Direct Loan program at the expense of the FFEL program. T he legislative history of the College Cost Reduction and Access Act of 2008 (CCRAA; P.L. 110-84) shows that when the establishment of a program of “loan forgiveness for certain public service jobs” was approved in the House-passed version of H.R. 2669, it was estimated that the costs of establishing such a program would be offset with savings that would result from borrowers switching from the FFEL program to the Direct Loan program for purposes of taking advantage of loan forgiveness benefits. U.S. Congress, House Committee on Education and Labor, College Cost Reduction Act of 2007, H.R. 2669, 110th Cong., 1st sess., June 25, 2007, H.Rept. 110-210 (Washington: GPO, 2007), pp. 71-72. 13 For additional information on changes made to the FFEL and Direct Loan programs by the SAFRA Act, see CRS Report R41127, The SAFRA Act: Education Program s in the FY2010 Budget Reconciliation (available to congressional clients upon request). Congressional Research Service 3 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program of the fourth quarter of FY2020, $245.9 bil ion in principal and interest on FFEL program loans, borrowed by or on behalf of 12.8 million11.0 mil ion students, remained outstanding and due to be repaid over the coming years.¹⁴

14 Over the history of the Direct Loan program, Congress has periodicallyperiodical y made changes to loan terms and conditions. Such changes have often been made as part of comprehensive amendments to the HEA, which authorizes the Direct Loan program; as part of amendments contained in budget reconciliation measures; or as part of amendments included in annual appropriations measures. Congress may well wel contemplate making future changes to loan terms and conditions.

Direct Loan Types

The following types of loans are currently made available to borrowers through the Direct Loan program:

•  Direct Subsidized Loans. These loans are available only to undergraduate students¹⁵ students15 who demonstrate financial need. Direct Subsidized Loans are characterized by having an interest subsidy that applies during an in-school period when a borrower is enrolled in an eligible program on at least a half-time basis, during a six-month grace period, during periods of authorized deferment, and during certain other periods. The Direct Subsidized Loans currently being made have a fixed interest rate that remains constant for the duration of the loan.
•  Direct Unsubsidized Loans. These loans are available to undergraduate students, graduate students, and professional students, without regard to the student' student’s financial need. Direct Unsubsidized Loans generallygeneral y do not have an interest subsidy. The Direct Unsubsidized Loans currently being made have a fixed interest rate that remains constant for the duration of the loan. The interest rate on loans made to graduate and professional students is higher than the rate on loans made to undergraduate students.
•  Direct PLUS Loans. These loans are available to graduate and professional students, and to the parents of undergraduate students who are dependent upon them for financial support. They are made without regard to financial need and generallygeneral y do not have an interest subsidy. The Direct PLUS Loans currently being made have a fixed interest rate, which remains constant for the duration of the loan; and the interest rate is higher than the rate on both Direct Subsidized Loans and Direct Unsubsidized Loans.
•  Direct Consolidation Loans.¹⁶ These loans allowal ow individuals who have at least one loan borrowed through either the Direct Loan program or the FFEL program 14 U.S. Department of Education, Office of Federal St udent Aid, Federal Student Aid Data Center, “ Location of Federal Family Education Loan (FFEL) Program Loans,” FY2020 Q4, https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/LocationofFFELPLoans.xls. Of this amount, $159.8 billion in principal and interest on FFEL program loans is held by commercial lenders and guaranty agencies, while the remaining $86.1 billion is held by ED. 15 Direct Subsidized Loans were once available to graduate and professional students for periods of instruction beginning prior to July 1, 2012. T he Budget Control Act of 2011 (BCA; P.L. 112-25) eliminated the availability of Direct Subsidized Loans to graduate and professional students for periods of instruction beginning on or after July 1, 2012. 16 A number of variations of Direct Consolidation Loans were once available. Married individuals who both had federal student loans were once able to obtain Joint Direct Consolidation Loans for purposes of repaying their combined Congressional Research Service 4 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program one loan borrowed through either the Direct Loan program or the FFEL program to refinance their eligible federal student loan debt by borrowing a new loan and using the proceeds to pay off their existing federal student loan obligations, including loans that are in default. Direct Consolidation Loans may be obtained without regard to financial need. The Direct Consolidation Loans currently being made have fixed interest rates, which are determined by calculating the weighted average of the interest rates on the loans that are consolidated, rounded up the result to the next higher one-eighth of a percentage point. Upon an individual obtaining a Direct Consolidation Loan, a new repayment period begins, which may be for a longer term than applied to the loans originally borrowed.¹⁷original y borrowed.17 A Direct Consolidation Loan may have a subsidized component¹⁸component18 and an unsubsidized component.¹⁹

19 Eligibility and Amounts That May Be Borrowed

Eligibility for an individual to borrow a loan through the Direct Loan program and the amount that he or she may borrow are governed by provisions in the HEA and by policies and procedures implemented by ED. All loan types except Direct PLUS Loans are made available without consideration of a borrower's ability to repay the loan. Eligibility student loan debt. Borrowers of these loans became jointly and severally liable for the debt —even in the event of divorce. T he authority to make new Joint Direct Consolidation Loans was repealed effective July 1, 2006 , under the Higher Education Reconciliation Act of 2005 (HERA; P.L. 109-171). Also, Special Direct Consolidation Loans were available during a limited period from January 17, 2012, through June 30, 2012, to borrowers who had both (1) one or more student loans made through the FFEL program and held by a commercial lender, and (2) one or more loans made through either the Direct Loan program or made through the FFEL program and held by ED. Eligible borrowers were afforded the opportunity to consolidate their commercially held FFEL program loans into a Special Dir ect Consolidation Loan, and in doing so simplify the repayment of their loans by having them all serviced by a single entity. A number of special repayment incentives were available to borrowers who consolidated their loans under this program. U.S. Department of Education, Office of Postsecondary Education, “ Special Direct Consolidation Loan Information - Short -Term Consolidation Opportunity Offered from January - June 30, 2012,” October 26, 2011, https://fsapartners.ed.gov/knowledge-center/library/electronic-announcements/2011-10-26/loans-subject-special-direct-consolidation-loan-information-short-term-consolidation-opportunity-offered-january-june-30-2012. 17 Loan consolidation is essentially a form of debt refinancing. Under current law, borrowers may use the proceeds of a Direct Consolidation Loan to pay off debt owed on one or more previously borrowed federal student loans and to begin a new repayment term of up to 30 years. Doing so may allow borrowers to lower their required monthly payment amount. Borrowers may not, however, obtain a lower interest rate on their federal student loan debt as a result of loan consolidation. 18 T he subsidized component of a Direct Consolidation Loan (also referred to as a Direct Subsidized Consolidation Loan) is the portion of a Direct Consolidation Loan attributable to the following loan types (some of which may have been made through programs authorized under T itle IV, Part B of the HEA): (1) Subsidized Federal Stafford Loans, (2) Guaranteed Student Loans, (3) Federal Insured Student Loans, (4) Direct Subsidized Loans, (5) Direct Subsidized Consolidation Loans, and (6) the portion of a Federal Consolidation Loan that is eligible for interest benefits during a period of deferment. 34 C.F.R. §685.220(c)(1). 19 T he unsubsidized component of a Direct Consolidation Loan (also referred to as a Direct Unsubsidized Consolidation Loan) is the portion of a Direct Consolidation Loan attributable to the following loan types (some of which may have been made through programs authorized under T itle IV, Part B and Part E of the HEA and T itle VII and T itle VIII of the Public Health Service Act [PHSA]): (1) Federal Perkins Loans, (2) National Direct Student Loans, (3) National Defense Student Loans, (4) Federal PLUS Loans, (5) Parent Lo ans for Under Graduate Students (PLUS), (6) Direct PLUS Loans, (7) Direct PLUS Consolidation Loans, (8) Unsubsidized Federal Stafford Loans, (9) Federal Supplemental Loans for Students (SLS), (10) Direct Unsubsidized Loans, (11) Direct Unsubsidized Consoli dation Loans, (12) Auxiliary Loans to Assist Students (ALAS), (13) Health Professions Student Loans (HPSL), (14) Loans for Disadvantaged Students (LDS), (15) Health Education Assistance Loans (HEAL), (16) Nursing Loans, and (17) t he portion of a Federal Consolidation Loan that is ineligible for interest benefits during a period of deferment. 34 C.F.R. §685.220(c)(2). Furthermore, the term Direct PLUS Consolidation Loan refers to the portion of a Direct Consolidation Loan attributable to (1) Direct PLUS Loans, (2) Direct PLUS Consolidation Loans, (3) Federal PLUS Loans, and (4) Parent Loans for Undergraduate Students that were repaid by the Direct Consolidation Loan. Congressional Research Service 5 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program implemented by ED. Al loan types except Direct PLUS Loans are made available without consideration of a borrower’s ability to repay the loan. Eligibility to borrow a Direct PLUS Loan to borrow a Direct PLUS Loan depends on an individual'’s creditworthiness.

The section that follows identifies and describes factors that determine an individual'’s eligibility to borrow one or more types of loans made available through the Direct Loan program. This is followed by a section that describes policies and procedures for determining amounts that may be borrowed.

Factors Affecting Eligibility to Borrow

For an individual to be eligible to borrow a loan through the Direct Loan program, the student borrower, or the student on whose behalf a parent borrower would obtain a Direct PLUS Loan, must meet a number of eligibility requirements. A broad set of general eligibility criteria applies to students who may benefit from a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan. An additional set of requirements applies specificallyspecifical y to applicants seeking to borrow a Direct PLUS Loan. Still Stil other requirements apply to applicants for Direct Consolidation Loans. Eligibility to borrow various types of loans is also affected by a student'’s dependency status, program level (e.g., undergraduate, graduate, or professional), undergraduate class level, financial need, cost of attendance (COA)²⁰20 of the academic program, estimated financial assistance (EFA) he or she expects to receive from other sources, and certain other factors. Factors that affect eligibility to borrow through the Direct Loan program are discussed below.

General Student-Based Eligibility Criteria

In general, for a student to be eligible to borrow a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan, or for a parent to borrow a Direct PLUS Loan on behalf of a student, the student must

•  be enrolled on at least a half-time basis as a regular student in either an eligible program at a participating eligible IHE, a preparatory program necessary for enrollment in an eligible program (for up to one year), or a teacher certification program;²¹
• program;21  not be incarcerated;
•  be a U.S. citizen or national, U.S. permanent resident, or other eligible noncitizen;²²
• noncitizen;22  maintain satisfactory academic progress as defined by the school;²³
• 23 20 Cost of attendance is defined at HEA §472. COA is determined by the IHE attended and generally includes tuition and fees, an allowance for books, supplies and transportation, room and board, and other expenses related to school attendance. 21 Loans may be obtained through the Direct Loan program for purposes of financing postsecondary expenses a t both domestic and foreign institutions. T he Direct Loan program is the only HEA, T itle IV program that makes federal student aid available for purposes of enrolling in a foreign institution. 22 Individuals who are citizens of the Freely Associated States (the Federated States of Micronesia, the Republic of Palau, and the Republic of the Marshall Islands) are ineligible to borrow Direct Loans. 34 C.F.R. §668.33(b). 23 See also 34 C.F.R. §668.34. For example, in part, “if a student is enrolled in an educational program of more than two academic years, the policy specifies that at the end of the second academic year, the student must have a GPA of at least a ‘C’ or its equivalent, or have academic standing consistent with the institution’s requirements for graduation.” Congressional Research Service 6 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  not be in default on a federal student loan, nor owing a refund on a grant or loan made under HEA, not be in default on a federal student loan, nor owing a refund on a grant or loan made under HEA, Title IV without having made satisfactory repayment arrangements;
• arrangements;  have on file at the IHE attended a statement of educational purpose stating that the loan will wil be used solely for educational expenses; and
•  meet applicable Selective Service System registration requirements.²⁴

;24 and  not have been convicted of a federal or state offense of sel ing or possessing il egal drugs that occurred during a period of enrollment for which the student was receiving federal student aid, unless eligibility is regained under specified circumstances including the passage of specified periods of time or the student’s completing a qualified drug rehabilitation program.25 The FAFSA Simplification Act of 2020 (Title VII of Division FF of P.L. 116-260, Consolidated Appropriations Act, 2021) eliminated the latter two restrictions on aid eligibility. Beginning with the 2021-2022 award year, the latter two restrictions wil no longer impact a student’s eligibility for Direct Loans.26 Student Dependency Status Student Dependency Status

For purposes of awarding federal student aid, dependency status determines whether a student is deemed to be dependent upon his or her parents'’ financial support, or is independent of their support. Dependency status is determined by a student'’s responses to questions on the Free Application for Federal Student Aid (FAFSA), which he or she must complete and submit to ED when applying for federal student aid.

A student is deemed to be an independent student if he or she

•  is, or will wil be, 24 years of age or older before January 1 of the award year;
•  is married at the time of completing the FAFSA;
• will  wil be a graduate or professional student at the start of the award year;
•  is currently serving on active duty in the Armed Forces for other than training purposes;
• purposes;  is a veteran of the Armed Forces;
•  has legal dependents other than a spouse;
•  was an orphan, in foster care, or a ward of the court, at any time since age 13;
•  is an emancipated minor or is in legal guardianship as determined by a court of competent jurisdiction in the individual'’s state of legal residence, or was when reaching the age of majority;
• 24 For additional information on the Selective Service System, see CRS Report R44452, The Selective Service System and Draft Registration: Issues for Congress. 25 For additional information, see U.S. Department of Education, Office of Federal Student Aid, 2020-2021 Federal Student Aid Handbook [hereinafter FSA Handbook], vol. 1, pp. 1-29–1-31. 26 IHEs may implement these changes as early as June 17, 2021, but must implement them no longer than 60 days thereafter. U.S Department of Education, Early Implementation of the FAFSA Simplification Act’s Removal of Requirements for T itle IV Eligibility Related to Selective Service Registration and Drug-Related Convictions, 86 Federal Register, 32252-32253, June 17, 2021. Congressional Research Service 7 link to page 20 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  is an unaccompanied youth who is homeless, or self-supporting and at risk of is an unaccompanied youth who is homeless, or self-supporting and at risk of being homeless; or
• being homeless; or  is a student for whom a financial aid administrator makes a documented determination of independence by reason of other unusual circumstances or based upon a documented determination of independence that was previously made by another financial aid administrator in the same award year.²⁵

27 A student who does not satisfy any of the criteria to qualify as an independent student is classified as a dependent student.²⁶

28 Dependency status determines the types of loans available to be borrowed by students and their families, which in turn affects the amounts that may be borrowed. Of particular importance with regard to undergraduate students is the fact that Direct PLUS Loans—the loans with the most flexible borrowing limits—are available to the parents of dependent students but not to the parents of independent students. However, independent undergraduate students are extended higher personal borrowing limits than are dependent students.²⁷29 These differential borrowing limits are predicated on the expectation that the postsecondary education expenses of dependent students will students wil be financed by some combination of students and their parents, whereas the postsecondary education expenses of independent students will typicallywil typical y be financed without parental assistance.

Dependency status also determines which individuals in a student'’s family will wil have their income and assets considered in need analysis calculations for the student (discussed below). Need analysis calculations for a dependent student are based on the income and assets of both the student and the student'’s parents,²⁸30 whereas need analysis calculations for an independent student are based on the income and assets of the student (and if applicable, the student'’s spouse).

Program Level

The academic level of the program in which a student is enrolled impacts both the types of loans that he or she may borrow and certain terms and conditions of such loans.

Undergraduate Studies

Undergraduate students may borrow Direct Subsidized Loans and Direct Unsubsidized Loans, and the parents of undergraduate students who are dependent upon them for financial support may borrow Direct PLUS Loans on the student'’s behalf. Direct PLUS Loans may not be 27 HEA, §480(d); FSA Handbook, Application and Verification Guide, pp. AVG-26 – AVG-27. 28 34 C.F.R. §668.2(b). 29 Dependent undergraduates may be eligible to borrow additional amounts in the form of Direct Unsubsidized Loans up to the larger loan limits available to independent undergraduate students (displayed in Table 1) in instances where a financial aid administrator determines that the student’s parents are unable to borrow Direct PLUS Loans due to certain exceptional circumstances. Exceptional circumstances may apply in instances of a student whose parent is unable to qualify to borrow Direct PLUS Loans due to having an adverse credit history, whose parent’s only income is from public assistance or disability benefits, whose parent is incarcerated, whose parent’s whereabouts are unknown, or whose parent is not a U.S. citizen or permanent resident. 30 Parental income and assets can be defined in a variety of ways in cases where a student’s parents are not married to each other. For additional information, see CRS Report R44503, Federal Student Aid: Need Analysis Form ulas and Expected Fam ily Contribution. Congressional Research Service 8 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program s behalf. Direct PLUS Loans may not be borrowed by undergraduate students nor by parents on behalf of undergraduate independent students.

students. Graduate and Professional Studies

Studies Graduate and professional students may borrow Direct Unsubsidized Loans and Direct PLUS Loans. To be eligible to borrow as a graduate or professional student, an individual must be enrolled in a program above the baccalaureate level or in one that leads to a first professional degree, must have completed at least the equivalent of three years of full-time study either prior to entering the program or as part of it, and must not be concurrently receiving Title IV aid as an undergraduate student.²⁹31 Graduate and professional students, all al of whom are classified as independent students, are extended higher borrowing limits than undergraduate students.

Undergraduate Class Level

For undergraduates, a student'’s class level determines the maximum amount the student may borrow on an annual basis. A student'’s class level is based on his or her progression according to the academic standards of the school the student attends. For undergraduate students, progression to a higher grade level for purposes of awarding a loan through the Direct Loan program does not necessarily correspond to the start of a new academic year (AY). For instance, a student who continues to make satisfactory academic progress but does not progress to the next grade level due to having completed an insufficient number of credits could borrow a loan through the Direct Loan program more than once as a first-year student. Once the student accrues enough credits to progress to the next higher grade level, he or she would become eligible for the higher borrowing limits available to second-year students, and so on.³⁰

32 Financial Need

Direct Subsidized Loans are need-based and may only be borrowed by students who demonstrate having financial need according to federal need analysis procedures. Applicants seeking to borrow Direct Subsidized Loans must undergo a need test through which the expected family contribution (EFC) to be made by the student, and, if applicable, the student'’s family, toward paying the student'’s postsecondary education expenses is determined on the basis of the financial resources available to the student.³¹33 According to federal student aid need analysis procedures, the sum of the student'’s EFC and the amount of estimated financial assistance (EFA) he or she expects to receive from sources other than programs authorized under Title IV of the HEA is subtracted from the estimated cost of attendance (COA) of the institution the student attends to determine the amount of need-based financial aid that he or she is eligible to receive.

Additional Additional procedures are followed to determine the composition of the student'’s federal student aid package. For instance, undergraduate students must receive a determination of their eligibility to receive a Federal Pell Grant³²Pel Grant34 (a form of need-based aid available only to undergraduates) prior to being certified by their school as being eligible to borrow a Direct Subsidized Loan. This procedure is designed to first provide maximum grant aid to needy students before they incur 31 34 C.F.R. §668.2(b). 32 For additional information on the impact of grade-level progression on annual borrowing limits, see FSA Aid Handbook, vol. 3, Chapter 5—Direct Loan Periods and Amounts. 33 For additional information on need analysis, see CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Fam ily Contribution. 34 For additional information on the Federal Pell Grant program, see CRS Report R45418, Federal Pell Grant Program of the Higher Education Act: Prim er. Congressional Research Service 9 link to page 22 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program student loan debt. The amount a student may borrow with a Direct Subsidized Loan may not exceed the amount of the student'’s unmet financial need after other forms of need-based federal student aid available under HEA, Title IV have been awarded. (For additional information, see the section on "“Limits on Borrowing Determined by Need Analysis and Packaging”" below.) Since July 1, 2012, only undergraduate students have been eligible to borrow Direct Subsidized Loans.

Direct Subsidized Loan Limitations for Post-July 1, 2013, First-Time Borrowers

Borrowers35 Since July 1, 2013, a student who is a first-time borrower³³36 may only borrow Direct Subsidized Loans for a period that may not exceed 150% of the published length of the academic program in which he or she is currently enrolled. This is referred to as the Direct Subsidized Loan maximum eligibility period. For undergraduates subject to this provision, a student enrolledenrol ed in a two-year associate degree program may receive Direct Subsidized Loans for a maximum eligibility period of no more than three years, while a student enrolled in a four-year bachelor'’s degree program may receive Direct Subsidized Loans for a maximum eligibility period of no more than six years.³⁴

years.37 Subsidized usage periods are used to measure a borrower'’s progress toward the maximum eligibility eligibility period. They are the quotient of dividing the number of days in the borrower'’s loan period (e.g., semester, quarter) for a Direct Subsidized Loan by the number of days in the academic year for which the borrower receives the Direct Subsidized Loan, rounded to the nearest tenth of a year. Subsidized usage periods are prorated based on intensity of enrollment (i.e., multiplied by 0.75 or 0.50 for three-quarter or half-time enrollment, respectively). A borrower' borrower’s remaining eligibility period is determined by subtracting a borrower'’s cumulative subsidized usage periods from the maximum eligibility period.

This provision also limits a borrower'’s eligibility for the interest subsidy on Direct Subsidized Loans. If a Direct Subsidized Loan borrower subject to this provision remains enrolled in the same program for which the loan was obtained, or another undergraduate academic program of equal or shorter length, beyond the applicable maximum eligibility period, the borrower will wil lose the interest subsidy and will wil become responsible for paying the interest that accrues on his or her Direct Subsidized Loans after the date that the maximum eligibility period was exceeded.

Two recently enacted laws affect Direct Subsidized Loan limitations for post-July 1, 2013, first-time borrowers. First, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), specifies that ED shal exclude from the maximum eligibility period any semester (or equivalent) that a student does not complete due to a qualifying emergency.38 35 T he provisions discussed herein are often referred to as “Subsidized Usage Limit Applies,” or SULA. 36 For this provision, first-time borrower means “an individual who has no outstanding balance of principal or interest on a Direct Loan Program or FFEL Program loan on July 1, 2013, or on the date the borrower obtains a Direct Loan Program loan after July 1, 2013.” 34 C.F.R. §685.200(f)(1)(i). 37 A student who borrows Direct Subsidized Loans to complete an associate’s degree program may subsequently borrow Direct Subsidized Loans to attend a bachelor’s degree program and still have remaining eligibility. For information on other program types, proration based on other than full-time enrollment intensities, and other requirements, see 34 C.F.R. §685.200(f). 38 T he CARES Act defines a qualifying emergency as (1) “a public health emergency related to the coronavirus declared by the Secretary of Health and Human Services pursuant to section 319 of the Public Health Service Act”; (2) “an event related to the coronavirus for which the President declared a major disaster or an emergency under section Congressional Research Service 10 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Second, the FAFSA Simplification Act of 2020 repealed these Direct Subsidized Loan limitations for post-July 1, 2013, first-time borrowers. Recently published ED regulations effectuate this repeal.39 Specifical y, effective August 13, 2021, the Direct Subsidized Loan Limitations for Post-July 1, 2013, First-Time Borrowers wil not apply to any borrower who receives a Direct Subsidized Loans first disbursed on or after July 1, 2021. In addition, for borrowers who have a Direct Subsidized Loan that is outstanding as of July 1, 2021, and on which the borrower has been responsible for paying interest because they exceeded the maximum eligibility period, ED wil “adjust their account to remove the interest that accrued and reapply the borrower’s payments accordingly.”40 Eligibility Requirements for Direct PLUS Loans Eligibility Requirements for Direct PLUS Loans

In addition to satisfying the general student-based eligibility criteria, an individual must meet certain other eligibility criteria specificallyspecifical y applicable to Direct PLUS loans.

Loans. Parent Borrower Eligibility Criteria

Criteria Direct PLUS Loans may be borrowed by one or both parents of an undergraduate dependent student who meets the general student-based eligibility criteria described above. Eligible parents include biological parents, adoptive parents, and stepparents (if the stepparent'’s income and assets are taken into account in determining a student'’s EFC). A legal guardian may not borrow a Direct PLUS Loan on behalf of a student as a parent borrower. Parent borrowers must also meet the same citizenship and residency requirements as student borrowers; may not be in default on a federal student loan, nor owe a refund on a grant or loan made under Title IV without having made satisfactory repayment arrangements; and may not be incarcerated.

For a parent to be eligible to borrow a Direct PLUS Loan on behalf of an undergraduate dependent student, the student must have completed a FAFSA. There is no requirement that a parent borrower complete a separate FAFSA. The eligibility of a noncustodial parent to borrow a Direct PLUS Loan on behalf of his or her child is not impacted by that parent'’s financial information not appearing on the student'’s FAFSA.³⁵

41 Creditworthiness Requirements to Borrow Direct PLUS Loans

Eligibility Eligibility for an individual to borrow a Direct PLUS Loan also depends on that individual's ’s creditworthiness. Only individuals who do not have an adverse credit history, as determined according to procedures specified in regulations, may borrow Direct PLUS Loans.³⁶42 The creditworthiness criteria apply to both parent borrowers and to graduate and professional student borrowers. Creditworthiness is assessed on the basis of a credit report on the applicant obtained from at least one consumer reporting agency. An applicant is considered to have an adverse credit history if he or she either

• 401 or 501, respectively, of the Robert T . Stafford Disaster Relief and Emergency Assistance Act”; or (3) “a national emergency related to the coronavirus declared by the President under section 201 of the National Emergencies Act.” 39 U.S. Department of Education, “Repeal of the William D. Ford Federal Direct Loan Program Subsidized Usage Limit Restriction,” 86 Federal Register 31432-31438, June 14, 2021. 40 Ibid., p. 31433. 41 FSA Handbook, vol. 1, p. 1-108. 42 34 C.F.R. §685.200. Congressional Research Service 11 link to page 88 link to page 19 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  has one or more debts totaling more than $2,085 that are 90 days or more has one or more debts totaling more than $2,085 that are 90 days or more delinquent as of the date of the credit report, or that have been placed in collection or been charged off by the creditor as a loss within the two years prior to the credit report;³⁷43 or
•  has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under HEA, Title IV within the five years prior to the credit report.

An applicant who is determined to have an adverse credit history may not obtain a Direct PLUS Loan unless he or she either obtains an endorser³⁸44 or demonstrates that extenuating circumstances exist with regard to the applicant'’s credit history.³⁹45 Extenuating circumstances may include an updated credit report or a letter from a creditor stating that the applicant has made satisfactory repayment arrangements on a derogatory debt. In addition, to obtain a Direct PLUS Loan an applicant who has an adverse credit history must also complete credit counseling. (See the section on "“PLUS Loan Credit Counseling For Borrowers with Adverse Credit.".”) An applicant may not, however, be rejected for a Direct PLUS Loan on the basis of having no credit history.

A dependent undergraduate student whose parents are unable to obtain a Direct PLUS Loan due to their having an adverse credit history may borrow a larger amount in the form of a Direct Unsubsidized Loan. In such a case, the student may borrow up to the borrowing limit applicable to a similarly situated independent undergraduate student. (These amounts are discussed below in the section on "“Amounts That May Be Borrowed.")

.”) Eligibility Requirements for Direct Consolidation Loans

To be eligible to obtain a Direct Consolidation Loan, a borrower must have an outstanding principal balance on at least one loan that was made through either the Direct Loan program or the FFEL program. In addition, with respect to the loans being consolidated, the applicant must be (1) in the grace period prior to entering repayment; (2) in repayment status, but not in default; or (3) in default, but having made satisfactory repayment arrangements.

For the purposes of including a defaulted loan in a Direct Consolidation Loan, making "“satisfactory repayment arrangements"” means that the defaulted borrower has made at least three consecutive voluntary full monthly payments within 20 days of the due date, or has agreed to repay according to one of the Income-Driven Repayment (IDR) plans (described below). A borrower of a defaulted loan who is subject to a court judgment or wage garnishment is ineligible to obtain a Direct Consolidation Loan.

In general, a set of loans may be consolidated only once. However, in select circumstances a Direct Consolidation Loan may be used to repay a previously obtained Direct Consolidation Loan or a FFEL Consolidation Loan. Loans made to borrowers within 180 days prior to or after the date of obtaining a Direct Consolidation Loan may be added to that Direct Consolidation Loan. A borrower who has an existing Direct Consolidation Loan and also has other eligible loans that have not been consolidated, or who subsequently obtains other eligible loans, may consolidate those loans with his or her existing loans for purposes of obtaining a new Direct Consolidation Loan. A borrower who has an existing FFEL Consolidation Loan and whose loan is in default or 43 T he $2,085 threshold will periodically be adjusted for inflation. 34 C.F.R. §685.200(c)(2). 44 An endorser is an individual who does not have an adverse credit history , who signs a promissory note, and who agrees to repay the loan should the borrower not do so. 34 C.F.R. §685.102(b). 45 A dependent student on whose behalf the loan would be made to a parent borrower may not be an endorser. Congressional Research Service 12 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program has been referred to a guaranty agency for default aversion assistance46has been referred to a guaranty agency for default aversion assistance⁴⁰ may consolidate his or her loan into a Direct Consolidation Loan for purposes of repaying according to one of the IDR plans. FinallyFinal y, a borrower who has an existing FFEL Consolidation Loan may consolidate that loan into a Direct Consolidation Loan for the purposes of applying for loan forgiveness through the Public Service Loan Forgiveness (PSLF) Program or to receive the No Accrual of Interest on Loans of Certain Active Duty Servicemembers benefit that is only available to borrowers of loans made through the Direct Loan program.

A Direct Consolidation Loan must consist of at least one eligible loan made through either the Direct Loan or FFEL programs, and may also contain other types of federal student loans. The eligible eligible types of federal student loans made through the Direct Loan and FFEL programs include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, Direct Consolidation Loans, FFEL Subsidized Stafford Loans, FFEL Unsubsidized Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.⁴¹47 The eligible types of federal student loans made outside of the Direct Loan and FFEL programs are Federal Perkins Loans, Guaranteed Student Loans, Federal Insured Student Loans, National Direct Student Loans, National Defense Student Loans, Supplemental Loans for Students (SLS), Auxiliary Loans to Assist Students (ALAS), Health Education Assistance Loans (HEAL), Health Professions Student Loans (HPSL), Loans for Disadvantaged Students (LDS), and Nursing Loans.⁴²

Nurse Faculty Loans, and Nursing Student Loans.48 Amounts That May Be Borrowed

The maximum amounts that a student or a parent may borrow in loans made through the Direct Loan program are determined by the interaction of annual and aggregate borrowing limits and federal need analysis and packaging procedures. Limitations on borrowing vary by loan type, borrower characteristics, program level, and class level.

Annual Loan Limits

For undergraduate students, annual loan limits cap both the maximum amount that may be borrowed in Direct Subsidized Loans and the total combined amount that may be borrowed through Direct Subsidized Loans and Direct Unsubsidized Stafford Loans during a single academic year. Annual loan limits for Direct Subsidized Loans vary by undergraduate class level; however, at any particular class level these limits are the same for both undergraduate dependent students and undergraduate independent students. Annual loan limits for the total combined amount of Direct Subsidized Loans and Direct Unsubsidized Loans that may be borrowed by undergraduate students vary by both undergraduate class level and by student dependency status.

For graduate and professional students, annual loan limits cap the maximum that may be borrowed in Direct Unsubsidized Loans, irrespective of class level. However, higher exceptional annual loan limits are extended to students enrolled in certain health professions programs. There is no specified limit to the amount that may be borrowed in Direct PLUS Loans by either parent borrowers or by graduate and professional students.

46 Default aversion activities are means of assistance provided by a guaranty agency to a lender that holds a delinquent loan prior to the loan legally entering default status. HEA §§422(h)(8) and 422B(d). 47 Over the history of the Direct Loan program and the FFEL program, the terminology used to refer to various types of loans has changed. A complete listing of loan types eligible for inclusion in a Direct Consolidation Loan is specified in regulations at 34 C.F.R. §685.220(b). 48 Several of these loan types were once made through programs that have since been discontinued. Congressional Research Service 13 link to page 34 link to page 34 link to page 20 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 link to page 21 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program The annual loan limits apply to the maximum principal amount that may be borrowed in an academic year. Any loan origination fees that the borrower is required to pay (see the "Loan “Loan Origination Fees”" below) are included in the amount to be borrowed that is subject to these limits.

Borrowing limits for a student who is enrolled for less than one year are prorated based on the fraction of the academic year for which the student is enrolled. An academic year is defined in statute as a minimum of 30 weeks of instruction for courses of study measured in credit hours, or 26 weeks for courses of study measured in clock hours and during which a full-time student is expected to complete a minimum of 24 semester or trimester hours, 36 quarter hours, or 900 clock hours.

Aggregate Loan Limits

Aggregate loan limits cap the total cumulative amount of outstanding loans that a student may borrow through certain loan types. One limit applies to the total amount that may be borrowed in Direct Subsidized Loans and another limit applies to the total combined amount that may be borrowed in Direct Subsidized Loans and Direct Unsubsidized Loans.⁴³49 No aggregate limits are placed on Direct PLUS Loan borrowing. The aggregate loan limits apply only to the aggregate outstanding principal balance (OPB) of the loans a student has borrowed. They do not apply to accrued or capitalized interest.⁴⁴50 Annual and aggregate limits that have applied to loans made through the Direct Loan program since July 1, 2012, are presented inin Table 1.

A listing of the annual and aggregate loan limits that have applied throughout the history of the Direct Loan program is presented in Appendix C inin Table C-1.

Limits on Borrowing Determined by Need Analysis and Packaging

The process of awarding one or more forms of federal student aid to a student in accordance with federal student aid need analysis procedures and individual program rules is referred to as packaging. Financial aid administrators at IHEs are afforded a degree of discretion in determining how aid is packaged. The packaging of aid may affect the amounts that may be borrowed by a student or by a parent on behalf of a student through the various types of loans offered through the Direct Loan program. The process for packaging aid provided through the Direct Loan program is briefly described below. The following terms are instrumental in describing this process.

• process.  Cost of AttendanceCost of Attendance (COA). This is an institution-determined amount indicative of a student'’s educational expenses for a period of enrollment (e.g., an academic year) at the IHE. It is determined by the institution a student attends and may include tuition and fees, and allowancesal owances for room and board, books, supplies, transportation, loan fees, personal expenses, child or dependent care, etc.⁴⁵51 For the Direct Loan program, a student'’s COA represents an absolute limit on the maximum amount of aid he or she may receive during an academic year.
• Expected Family Contribution  Expected Family Contribution (EFC). This is the dollar amount a student and the student'’s family (e.g., parents or spouse) are expected to contribute toward his or her education expenses for a year.⁴⁶52 A student'’s EFC is calculated according to procedures specified in law using information supplied by the student on the FAFSA.⁴⁷53 The formula for calculating a student'’s EFC takes into account myriad factors including taxed and untaxed income, financial assets, certain benefits (e.g., Social Security, unemployment compensation), family size, and the number of family members to be enrolled in college during an academic year.  Estimated Financial Assistanceyear.
• Estimated Financial Assistance (EFA). This is the amount of aid anticipated to be made available to a student from federal, state, institutional, or other sources for a period of enrollment. It includes grant, scholarship, fellowshipfel owship, loan, and need-based employment assistance. For purposes of need analysis and packaging, two variations of EFA are relevant: (1) EFA not received under HEA, Title IV programs, and (2) EFA from all al sources. EFA does not include Iraq and 51 HEA §§472 and 479A. For additional information on COA, see FSA Handbook, vol. 3, Chapter 2—Cost of Attendance (Budget). 52 HEA T itle IV, Part F—Need Analysis. For additional information on the EFC, see CRS Report R44503, Federal Student Aid: Need Analysis Form ulas and Expected Fam ily Contribution . 53 For additional information, see HEA, T itle IV, Part F, and FSA Handbook, Application and Verification Guide, Chapter 3—Expected Family Contribution (EFC). Congressional Research Service 16 link to page 20 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program sources. EFA does not include Iraq and Afghanistan Service Grants; federal veterans'’ education benefits; or, for purposes of awarding Direct Subsidized Loans, Segal AmeriCorps Education Awards.⁴⁸
• Financial Need54  Financial Need. This is the amount determined by subtracting a student'’s EFC and EFA not received under HEA, Title IV from the student'’s COA.55  Unmet Financial Needs COA.⁴⁹
• Unmet Financial Need. This is the amount determined by subtracting the sum of a student'’s EFC and EFA from the student'’s COA.⁵⁰

56 When packaging Title IV aid, the total amount of need-based aid awarded to a student may not exceed the amount of the student'’s financial need. A common packaging strategy is to award need-based aid that is not required to be repaid (e.g., Federal Pell Pel Grant, Federal Supplemental Educational Opportunity Grant [FSEOG], and Federal Work-Study [FSW] awards) before awarding loan aid, which must be repaid. With respect to loans made through the Direct Loan program, only Direct Subsidized Loans are need-based; however, Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans may all al be awarded to satisfy a student'’s unmet financial need. Additionally, Additional y, once a student'’s unmet financial need has been satisfied, non-need-based aid, such as Direct Unsubsidized Loans and Direct PLUS Loans, may be awarded to replace some or all al of a student'’s EFC. OverallOveral , when packaging Title IV aid, the total amount awarded (including both need-based and non-need-based aid) may not exceed the student'’s COA, less EFA. Processes for determining the amount of aid that may be awarded through the various types of loans offered through the Direct Loan program are described below.

Direct Subsidized Loans

Loans Direct Subsidized Loans are need-based. They may be awarded to satisfy a student'’s unmet financial need. The maximum Direct Subsidized Loan amount a student is eligible to borrow is determined by summing the student'’s EFC and EFA, and then subtracting that amount from the student'student’s COA for the school attended. As discussed above, Direct Subsidized Loan borrowing is also capped by applicable annual loan limits. The calculation shown in the text box below is used to determine the amount that a student may borrow through a Direct Subsidized Loan.

limit57] Direct Unsubsidized Loans Direct Unsubsidized Loans are non-need-based. Students are eligible to borrow Direct Unsubsidized Loans irrespective of the amount of their EFC, in amounts up to the lesser of (1) the result of subtracting the student'’s EFA (including, for undergraduate students, any amount borrowed through a Direct Subsidized Loan) from COA, or (2) the result of subtracting the amount borrowed through a Direct Subsidized Loan from the annual Direct Subsidized Loan and Direct Unsubsidized Loan combined borrowing limit applicable to the student'’s program level 54 For additional information on the EFA, see HEA, §§428(a)(2)(C)(ii) and 480(j), 34 CFR §685.102(b), and FSA Handbook, vol. 3, Chapter 7—Packaging Aid. 55 For additional information on unmet financial need, see HEA §471, and FSA Handbook, Appendix A: Federal Student Aid Glossary and Acronyms, p. A-34. 56 For additional information, see FSA Handbook, vol. 3, pp. 3-121, 3-191. 57 For information on Direct Subsidized Loan limits, see Table 1. Congressional Research Service 17 link to page 20 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program s program level and class level. The calculation shown in the text box below is used to determine the amount that a student may borrow through a Direct Unsubsidized Loan.

Direct PLUS Loans

Direct PLUS Loans are non-need-based. Graduate and professional students and the parents of dependent undergraduate students may borrow Direct PLUS Loans irrespective of the student's ’s EFC. The amount that may be borrowed through a Direct PLUS Loan is limited to the result of subtracting the EFA (including any amount borrowed through a Direct Subsidized Loan or a Direct Unsubsidized Loan) of the student on whose behalf the loan will wil be made from the COA of the institution attended. The calculation shown in the text box below is used to determine the amount that a student or a parent may borrow through a Direct PLUS Loan.

With regard to parent borrowing, the total Direct PLUS Loan eligibility amount may be borrowed by one parent, or it may be divided among more than one parent (including noncustodial parents) and borrowed in separate amounts by each.

Interest on Direct Loan Program Loans

Interest is charged on loans made through the Direct Loan program. It constitutes a charge for the use of borrowed money over a specified period of time. In the Direct Loan program, interest is calculated based on rates that are set according to formulas specified in the HEA. Interest accrual is calculated using a simple daily interest formula. The federal government offers several types of interest subsidies that may limit the amount of interest that accrues on the outstanding principal balance of a loan. In certain circumstances, a borrower may be permitted to defer paying some or all al of the interest that has accrued on his or her loan(s) until a later point in time. If a borrower does not pay the interest that has accrued, it may, in certain circumstances, be capitalized (i.e., added to the outstanding principal balance of the borrower'’s loan).

Interest Rates

Interest rates on loans made through the Direct Loan program are set according to procedures specified by statute. Since the inception of the Direct Loan program in 1994, a variety of different procedures have been used for setting student loan interest rates. The loans currently being made through the Direct Loan program have fixed interest rates that remain constant from the time a loan is made until it is paid in full. Since July 1, 2013, Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans, have been made with fixed interest rates that are indexed to the interest rates on 10-year U.S. Treasury notes that are auctioned just prior to the start of the academic year during which the loans are made. Since February 1, 1999, Direct Consolidation Loans have been made with fixed interest rates that are based on the weighted average of the interest rates on the loans that are included in the Direct Consolidation Loan. 58 For information on loan limits for Direct Subsidized Loans and Direct Unsubsidized Loans, combined, see Table 1. Congressional Research Service 18 link to page 97 link to page 102 link to page 104 link to page 105 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Previously, other procedures had been used for setting student loan interest rates, and a number of loans that had been made according to these prior procedures remain outstanding.

Procedures for Setting Student Loan Interest Rates

The various procedures that have been used for setting interest rates on loans made through the Direct Loan program can be broadly categorized as follows: (1) variable interest rates that are indexed to the interest rates on short-term U.S. Treasury securities that are auctioned just prior to the start of the academic year during which the rate will wil be in effect, (2) fixed interest rates that are set according to the weighted average of the interest rates of the loans included in a Direct Consolidation Loan, (3) fixed interest rates that are specified in statute, and (4) fixed interest rates that are indexed to the interest rates on long-term U.S. Treasury securities that are auctioned just prior to the start of the academic year during which the loans are made. Because loans with interest rates that have been set according to each of these categories still stil remain outstanding, each is briefly discussed below. Appendix C presents a detailed history of the various procedures that have been used to set the interest rates that apply to Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans (Table C-2); the procedures that have been used to set the interest rates that apply to Direct Consolidation Loans (Table C-3); and the interest rates that have been in effect on these loans on a year-by-year basis (Table C-4).

Variable Interest Rates Indexed to Short-Term U.S. Treasury Securities

At the inception of the Direct Loan program in 1994, all al loan types were made with variable interest rates that would adjust once per year on July 1. On variable rate loans, the applicable interest rate is determined according to a formula specified in statute. For each 12-month period that extends from July 1 through June 30, the applicable interest rate is indexed to the bond equivalent rate of 91-day U.S. Treasury billsbil s (or other short-term U.S. Treasury securities) auctioned at the final auction held prior to the preceding June 1.⁵³59 An interest rate add-on increases the rate above the rate of the index. Different interest rate add-ons may apply to loans depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan), the status of the loan (e.g., in school, grace, repayment), and when the loan was made. An interest rate cap of 8.25% applies to variable rate Direct Subsidized Loans and Direct Unsubsidized Loans and the portion of a variable rate Direct Consolidation Loan attributable to such loans. An interest rate cap of 9.0% applies to variable rate Direct PLUS Loans and the portion of a variable rate Direct Consolidation Loan attributable to a PLUS Loan. Direct Consolidation Loans were made with variable interest rates through January 31, 1999, while all al other types of Direct Loan program loans continued to be made with variable interest rates through June 30, 2006.

Fixed Interest Rates on Direct Consolidation Loans

Loans Since February 1, 1999, Direct Consolidation Loans have been made with fixed interest rates that remain in effect for the duration of the loan.⁵⁴60 The applicable interest rate on a Direct Consolidation Loan is determined by calculating the weighted average of the interest rates in 59 T he practice of using the rate of the final auction held prior to the preceding June 1 provides approximately one month of lead time for ED to establish interest rates for particular loan types and to communicate this informati on to current and prospective borrowers and to loan servicers. 60 For Direct Consolidation Loans, the determination of whether certain terms and conditions apply to a given loan (e.g., which interest rate setting formula applies) is based on the date when t he application for the Direct Consolidation Loan is received by the loan servicer. Congressional Research Service 19 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program effect on the loans being consolidated, and rounding the result up to the nearest higher one-eighth of 1%.⁵⁵61 If a borrower obtains a Direct Consolidation Loan to repay one or more loans having a variable interest rate, the weighted average of the interest rates in effect on the loans being consolidated will wil be used to set the fixed rate that will wil apply for the duration of the new Direct Consolidation Loan.⁵⁶62 For Direct Consolidation Loans made during the period from February 1, 1999, through June 30, 2013, the maximum interest rate was capped at 8.25%.⁵⁷63 There is no maximum interest rate for Direct Consolidation Loans made on or after July 1, 2013.

Fixed Interest Rates Specified in the HEA

During the period from July 1, 2006, through June 30, 2013, all al loans made through the Direct Loan program, with the exception of Direct Consolidation Loans, were made with fixed interest rates that were determined by Congress and specified in statute. Different fixed interest rates applied applied depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan), the program level for which it was borrowed (e.g., undergraduate, graduate), and the academic year for which the first disbursement of the loan was made (e.g., AY2007-2008, AY2008-2009). For these loans, the interest rate that was in effect when the loan was made remains in effect for the duration of the loan.

Fixed Interest Rates Indexed to Long-Term U.S. Treasury Securities

With the exception of Direct Consolidation Loans, all loans made through the Direct Loan program on or after July 1, 2013, have market-indexed fixed interest rates. For these loans, the applicable interest rate is set according to a formula specified in statute and remains in effect for the duration of the loan. For new loans made during each 12-month period that extends from July 1 through June 30, the applicable interest rate is indexed to the bond equivalent rate of 10-year U.S. Treasury notes auctioned at the final auction held prior to the preceding June 1.64 An interest rate add-on increases the applicable borrower rate above the rate of the index. Different interest rate add-ons apply depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan) and the program level for which it was borrowed (e.g., undergraduate, graduate). An interest rate cap of 8.25% applies to Direct Subsidized Loans and to Direct Unsubsidized Loans made to undergraduate students; a cap of 9.5% applies to Direct Unsubsidized Loans made to 61 For variable rate loans made through the FFEL program and the Direct Loan program during the period from July 1, 1995, through June 30, 2006, interest rates are 0.6 percen tage points lower during in-school and grace periods than during repayment periods. A borrower may apply to obtain a Direct Consolidation Loan during the six-month grace period after ceasing to be enrolled on at least a half-time basis, and by doing so may lock in the lower grace period interest rate. 62 During the period when Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans were made with variable rates and Direct Consolidation Loans were made with fixed interest rates, the availability of fixed rate Direct Consolidation Loans provided borrowers with an option essentially to lock in rates determined according to the variable interest rate formula (rounded to the nearest higher one-eighth of 1%) that a borrower may have considered to be advantageous. T he approximate one-month lead between when future interest rates become known and when they go into effect provided borrowers a window during which they could evaluate whether to obtain a Direct Consolidation Loan at the then-current rate (should rates for the next year be scheduled to increase) or defer the option to consolidate for another year (should rates for the next year be scheduled to decrease). 63 During the period when the 8.25% interest rate cap was in effect, a borrower who had one or more loans with an interest rate that was greater than the cap (e.g., a FFEL PLUS Loan made with an 8.5% interest rate) could lower the applicable interest rate by including the loan(s) in a Direct Consolidation Loan. 64 T he final auction held prior to the preceding June 1 is generally held in May. See U.S. Department of the T reasury, T reasury Direct, “General Auction T iming,” https://www.treasurydirect.gov/instit/auctfund/work/auctime/auctime.htm#:~:text=20%2Dyear%20bond%20and%2030,September%2C%20October%2C%20and%20December, accessed May 17, 2021. Congressional Research Service 20 link to page 27 link to page 32 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program made to undergraduate students; a cap of 9.5% applies to Direct Unsubsidized Loans made to graduate and professional students; and a cap of 10.5% applies to all al Direct PLUS Loans. The interest rates applicable to loans being made through the Direct Loan program in AY2019-2020 are presented below in Table 2.

means not applicable. Interest Accrual

Interest accrual is the process through which interest accumulates over time. In the Direct Loan program, the accrual of interest is calculated using a simple daily interest formula.⁵⁸65 With this formula, interest accrues only on the outstanding principal balance (OPB) of the loan. This is in contrast to a compound interest formula, in which interest accrues on both the OPB of the loan and any interest that has accrued during a prior period. In a limited set of circumstances, accrued interest that has not been paid by a borrower may be capitalized, or added to the OPB of the loan. This is discussed below in the "“Interest Capitalization" section.

” section. According to the simple daily interest formula used in the Direct Loan program, the amount of interest that accrues over a certain period of time is the product of (1) the number of days of interest being calculated (e.g., days since the last payment was made), (2) the OPB of the loan, and (3) an interest rate factor. The interest rate factor is the quotient of the applicable interest rate of the loan⁵⁹interes t rate 65 U.S. Department of Education, Office of Federal Student Aid, “ Understand how int erest is calculated and what fees are associated with your federal student loan: How is interest calculated?”, https://studentaid.ed.gov/sa/types/loans/interest-rates#how-calculated, accessed May 17, 2021. Congressional Research Service 21 link to page 28 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program of the loan66 divided by the number of days in a year (365.25).67 divided by the number of days in a year (365.25).⁶⁰ An example of the calculation of accrued interest over a 30-day period is provided in the text box below.

13.79 For loans made through the Direct Loan program, interest begins to accrue on the OPB once the first instal mentfirst installment of a loan is disbursed. Unless it is subsidized (see "“Subsidized Interest”"), interest accrues during the entirety of the period that a loan is in effect, irrespective of whether the borrower is expected to be making payments on it.

Subsidized Interest

In a limited set of circumstances, the federal government subsidizes some or all al of the interest that would otherwise accrue on loans made through the Direct Loan program.⁶¹68 During periods when an interest subsidy is provided, borrowers are relieved of the requirement to pay the interest that would accrue. The availability of an interest subsidy depends on factors such as the type of loan borrowed, eligibility loan borrowed, Direct Subsidized Loan Limitations for Post-July 1, 2013, First-Time Borrowers, eligibility for an authorized deferment, the repayment plan selected, and the borrower'borrower’s status as a servicemember in the Armed Forces.69 Interest subsidies that may be available available on loans made through the Direct Loan program are described below.⁶²

Interest Subsidy on Direct Subsidized Loans

70 66 In the simple daily interest formula, the applicable interest rate is expressed in decimal form. For example, 3.73% is expressed in decimal form as 0.0373. 67 In the current loan servicing environment, ED loan servicers utilize established standards to calculate daily interest. T he interest rate factor is determined by dividing the applicable interest rate by either 365.25 or 365 days, depending on the loan servicer platform. (CRS email communication with U.S. Department of Education, Office of Legislation and Congressional Affairs, September 25, 2018.) 68 In this report, the terms subsidized interest and interest subsidy refer to the government not charging a borrower for some or all of the interest that would ot herwise accrue on a loan during a specified period of time. T hese terms are not used to refer to the interest rate on a loan made through the Direct Loan program being below the market rate that would typically be available on unsecured credit extended to a borrower without regard to the borrower’s employment, income, assets, or credit history. T hese terms are also in contrast to the term loan subsidy, which is used for budgeting purposes and is the estimated present value of the cash flows from the governm ent (e.g., loan disbursements), excluding administrative expense, less the estimated present value of the cash flows to the government (e.g., repayments of principal and interest), resulting from a direct loan or loan guarantee, discounted to the time when the loan is disbursed, and taking into account estimated effects of defaults, prepayments, fees, penalties, loan deferments, loan forgiveness, etc. 69 In addition, in response to the COVID-19 pandemic, for March 13, 2020 through at least September 30, 202 1, the accrual of interest on all types of Direct Loan program loans is suspended. T his can be viewed as a limited-time interest subsidy. 70 In addition to the Direct Loan program interest subsidies described here, a student loan interest deduction is made available through the federal tax code. For information on this interest subsidy, see CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects. Congressional Research Service 22 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Interest Subsidy on Direct Subsidized Loans On Direct Subsidized Loans, and on the subsidized component of Direct Consolidation Loans, interest is subsidized by the government (i.e., interest does not accrue) during in-school periods while a borrower is enrolled in an eligible program on at least a half-time basis, during a six-month grace period, and during periods of authorized deferment. Due to amendments to the HEA made by the Consolidated Appropriations Act, 2012 (P.L. 112-74), interest is not subsidized during the grace period on Direct Subsidized Loans disbursed between July 1, 2012, and June 30, 2014.

2014. Limit on Direct Subsidized Loan Interest Subsidy if 150% of Published Academic Program Length is Exceeded

For a borrower to whom the Direct Subsidized Loan Limitations for Post-July 1, 2013, First-Time Borrowers applies, eligibility both to borrow a Direct Subsidized Loan and to receive the interest subsidy on Direct Subsidized Loans previously obtained is limited to a period that may not exceed 150% of the published length of the academic program in which the student is enrolled. If a Direct Subsidized Loan borrower subject to this provision remains enrolled beyond the applicable maximum eligibility period, the borrower will wil lose the interest subsidy and will wil become responsible for paying the interest that accrues on his or her Direct Subsidized Loans after the date that the maximum eligibility period is exceeded.⁶³

71 The FAFSA Simplification Act of 2020 repealed these Direct Subsidized Loan limitations for post-July 1, 2013, first-time borrowers. Effective August 13, 2021, these limitations wil not apply to any borrower who receives a Direct Subsidized Loans first disbursed on or after July 1, 2021.72 For borrowers who have a Direct Subsidized Loan that is outstanding as of July 1, 2021, and on which the borrower has been responsible for paying interest because they exceeded the maximum eligibility period, ED wil “adjust their account to remove the interest that accrued and reapply the borrower’s payments accordingly.”73 Interest Rate Reduction for Automatic Debit Repayment The HEA Interest Rate Reduction for Automatic Debit Repayment

The HEA authorizes the Secretary of Education (the Secretary) to offer borrowers of loans made through the Direct Loan program an interest rate reduction as an incentive for having loan payments automaticallyautomatical y debited from a bank account.⁶⁴74 The Secretary currently offers a 0.25 percentage point interest rate reduction for automatic debit repayment. This option helps ensure that borrowers make their student loan payments on time. The interest rate reduction for automatic debit repayment does not apply during in-school, grace, deferment, or forbearance periods.

periods. 71 34 C.F.R. §685.200(f). 72 U.S. Department of Education, "Repeal of the William D. Ford Federal Direct Loan Program Subsidized Usage Limit Restriction," 86 Federal Register 31432-31438, June 14, 2021. 73 Ibid., p. 31433. 74 HEA, §455(b)(9); 34 C.F.R. §685.211(b). Until June 30, 2012, the Secretary was authorized to offer a variety of interest rate reductions to borrowers as a means of encouraging on -time repayment . T hese incentives were required to be cost neutral to the government . Congressional Research Service 23 link to page 36 link to page 36 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Interest Subsidies on Eligible Loans Repaid According to Certain Income-Driven Repayment (IDR) Plans During Negative Amortization

Interest subsidies are provided on certain types of loans repaid according to the Income-Based Repayment (IBR) plans, the Pay As You Earn (PAYE) repayment plan, and the Revised Pay As You Earn (REPAYE) repayment plan during periods when a borrower'’s loans are in negative amortization. (Details of these income-driven repayment plans are described below in "“Loan Repayment Plans" ” section.) A common characteristic of these IDR plans is that an interest subsidy is provided on Direct Subsidized Loans and on the subsidized component of Direct Consolidation Loans for a maximum of the first three consecutive years that the borrower repays according to the applicable IBR plan. In addition, in the REPAYE plan an extended, partial interest subsidy is provided on all eligible al eligible loan types. These IDR plan interest subsidies are described in greater detail below.

Three-Year Interest Subsidy on Direct Subsidized Loans Repaid According to Certain IDR Plans During Negative Amortization

The structure of the IBR, PAYE, and REPAYE plans provide that in certain instances, a borrower' borrower’s required monthly payment amount may be insufficient to pay all al of the interest that has accrued on the borrower'’s Direct Subsidized Loans, or on the subsidized component of a Direct Consolidation Loan. In such instances, the Secretary does not charge the borrower for the amount of the accrued interest that is in excess of the applicable monthly payment amount (referred to as the remaining accrued interest) for a period of up to the first three years from the date the borrower began repaying according to the IDR plan. For borrowers who switch repayment plans and repay their loans sequentiallysequential y according to more than one of the IDR plans under which a subsidized loan interest subsidy is provided, a cumulative three-year limit on receipt of the interest subsidy applies to periods of repayment made under any of the aforementioned IDR plans.⁶⁵75 Any periods during which the borrower receives an economic hardship deferment and during which an interest subsidy is provided on Direct Subsidized Loans and on the subsidized component of Direct Consolidation Loans are excluded from the three-year eligibility limit.

eligibility limit. 50% Interest Subsidy on All Eligible Eligible Loan Types Repaid According to the REPAYE Plan During Negative Amortization

In addition to the three-year interest subsidy of the remaining accrued interest on Direct Subsidized Loans and the subsidized component of Direct Consolidation Loans described above, the REPAYE plan includes a 50% subsidy of the remaining accrued interest on all loans.⁶⁶ al loans.76 Beyond the three-year period for Direct Subsidized Loans and the subsidized component of Direct Consolidation Loans (described above), and during all al periods of repayment on other eligible eligible loans, in the instance that a borrower'’s required monthly payment amount is insufficient to pay all al of the interest that has accrued on his or her loans, the Secretary charges the borrower 75 With regard to Direct Consolidation Loans, the three-year period also includes periods during which an interest subsidy was provided on the underlying loans while they were being repaid according to an IDR plan during periods of negative amortization. 76 34 C.F.R. §685.209(c)(2)(iii). Direct PLUS Loans made to parent borrowers and Direct Consolidation Loans that repaid either a Direct PLUS Loan or a FFEL PLUS Loan made to a parent borrower are ineligible to be repaid according to the REPAYE plan. Congressional Research Service 24 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program for only 50% of the remaining accrued interest.77for only 50% of the remaining accrued interest.⁶⁷ There is no time limit on receipt of the REPAYE plan 50% interest subsidy.

No Accrual of Interest on Loans of Certain Active Duty Servicemembers

For all Servicemembers For al types of loans made through the Direct Loan program that were first disbursed on or after October 1, 2008, no interest accrues during a period of up to 60 months while the borrower is serving on active duty in the Armed Forces or is performing qualifying National Guard duty in an area of hostilities during a war or national emergency. For Direct Consolidation Loans, the no accrual of interest subsidy applies only to the portion of the loan that was used to repay other loans that were first disbursed on or after October 1, 2008.

SCRA 6% Interest Rate Cap on Loans of Borrowers Who Enter Military Service

The Servicemembers Civil Relief Act (SCRA) provides that for individuals who borrow loans after August 14, 2008, but prior to their entrance into military service, the interest rate on their loans must be capped at a rate of 6% for the duration of their military service.⁶⁸78 The federal government, as the creditor on loans made through the Direct Loan program, must forgive interest above the 6% rate and may not accelerate repayment of the loans. Loan servicers are required to regularly check with the U.S. Department of Defense Manpower Data Center (DMDC) to determine whether borrowers qualify for the SCRA 6% interest rate cap and to extend the benefit to borrowers. Borrowers also have the option of completing an SCRA Interest Rate Limitation Request and submitting it to their loan servicer to document their eligibility for the 6% interest rate cap.⁶⁹

79 SCRA 6% Interest Rate Cap and Direct Consolidation Loans

Loans If a borrower repays one or more loans on which the interest rate has been reduced to 6% under the SCRA with a Direct Consolidation Loan, the 6% interest rate is required to be used as the applicable applicable interest rate on those loans for purposes of determining the weighted average interest rate of the new Direct Consolidation Loan.⁷⁰80 In such an occurrence, because Direct Consolidation Loans are currently being made with fixed interest rates, the 6% rate would essentiallyessential y be locked in and would remain in effect beyond the end of the borrower'’s period of military service.

Interest Subsidy on All Loan Types During Cancer Treatment Deferment

A Cancer Treatment Deferment is to be provided during periods while a borrower is receiving treatment for cancer and for the six months thereafter. During periods while a borrower receives this deferment, no interest accrues on his or her qualifying loans. The Cancer Treatment Deferment is available on all 77 T he borrower is not relieved of responsibility for payment of t he 50% of the remaining accrued interest that is charged. 78 For additional information on the SCRA, see CRS Report R45283, The Servicemembers Civil Relief Act (SCRA): Section-by-Section Sum mary. 79 U.S. Department of Education, Office of Federal Student Aid, Servicemembers Civil Relief Act (SCRA): Interest Rate Lim itation Request, OMB No. 1845-0135, https://fsapartners.ed.gov/sites/default/files/attachments/2020-01/011020RenewalSCRAIntRateLimitRequestAttach.pdf . 80 34 C.F.R. §685.202(a); U.S. Department of Education, Dear Colleague Letter GEN-16-20, “Retroactive Adjustments for Servicemembers Civil Relief Act (SCRA) from August 14, 2008, Onward,” November 15, 2016,https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/2016-11-15/gen-16-20-subject-retroactive-adjustments-servicemembers-civil-relief-act-scra-august-14-2008-onward. Congressional Research Service 25 link to page 46 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Deferment is available on al types of Direct Loan program loans that are either made on or after September 28, 2018, or that had entered repayment status on or before September 28, 2019.⁷¹ 2018.81 This benefit does not appear to be available for loans that were made prior to September 28, 2019 2018, but had not yet entered repayment prior to that date.

No Accrual of Interest During COVID-19 In response to the COVID-19 pandemic, for March 13, 2020 through at least September 30, 2021, the accrual of interest on al types of Direct Loan program loans is suspended.82 Thus, borrowers wil not be responsible for paying interest on their Direct Loan program loans during this period.83 Deferred Payment of Accrued Interest Deferred Payment of Accrued Interest

In certain instances, the obligation of a borrower to pay the interest that accrues on the outstanding principal balance of loans made through the Direct Loan program may be deferred. For instance, during in-school, grace, deferment, and forbearance periods, borrowers are not required to make payments of either principal oror the interest that accrues on the OPB. Also, for a borrower whose loans are in repayment status and who is repaying according to an IDR plan, if the amount of his or her required monthly payment is less than the amount of interest that has accrued on the loans, the payment of any accrued interest owed that is in excess of the required monthly payment amount may be deferred. Nonetheless, except to the extent that a borrower is receiving an interest subsidy, interest continues to accrue on his or her loans during periods while repayment of accrued interest is deferred.

Negative Amortization

The term negative amortization describes the situation in which the amount of interest that accrues on a loan over a given period of time is greater than the amount of payments that are made on it. In a case of negative amortization, the accumulation of unpaid accrued interest leads to the outstanding balance of principal and interest on the loan increasing over time. The deferred payment of accrued interest during periods of repayment according to the IDR plans (see " “Income-Driven Repayment (IDR) Plans"”) may lead to negative amortization.

Interest Capitalization

On certain occasions, any interest that has accrued but not been paid by a borrower may be added to the outstanding principal balance of the borrower'’s loans. This is calledcal ed interest capitalization. When interest is capitalized, it becomes part of the OPB and interest begins to accrue on that new, larger loan amount. Over time, interest capitalization increases the total amount a borrower is required to repay. Interest is capitalized in the following situations:

• Entering Repayment Status. Any unpaid interest that has accrued on a borrower' 81 HEA, §455(f)(3)); U.S. Department of Education, Office of Federal Student Aid, Cancer Treatment Deferment Request, OMB No. 1845-0154, https://studentaid.gov/sites/default/files/CancerT reatmentDeferment.pdf. 82 U.S. Department of Education, Office of Federal Student Aid, “Coronavirus and Forbearance Info for Students, Borrowers, and Parents,” https://studentaid.gov/announcements-events/coronavirus#forbearance-questions, accessed May 21, 2021. 83 For additional information, see CRS Report R46314, Federal Student Loan Debt Relief in the Context of COVID-19. Congressional Research Service 26 link to page 46 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  Entering Repayment Status. Any unpaid interest that has accrued on a borrower’s loans during the in-school and grace periods is capitalized at the time a borrower'’s loan enters repayment status.
•  Loan Consolidation. Any interest that has accrued on a borrower'’s loan and remains unpaid when the borrower includes the loan in a Direct Consolidation Loan is capitalized upon consolidation.
•  Annually, in ICR and Alternative Repayment Plans. Any unpaid interest that has accrued on a borrower'’s loan while the borrower is repaying according to the income-contingent repayment (ICR) plan or one of the alternative repayment plans is capitalized annually.
• annual y.  End of Partial Financial Hardship. Any unpaid interest that has accrued on a borrower' borrower’s loans during a period when he or she was repaying according to either of the IBR plans or the PAYE repayment plan and had a partial financial hardship is capitalized when the borrower is determined to no longer have a partial financial hardship.⁷²
• 84  Exit from IBR, PAYE, or REPAYE Repayment Plan. Any unpaid interest that has accrued on a borrower'’s loan during a period when he or she was repaying according to the IBR, PAYE, or REPAYE repayment plans is capitalized at the time the borrower changes to a different repayment plan.
•  End of Deferment or Forbearance. AnyIn general, any unpaid interest that has accrued on a borrower'’s loan during a period of deferment or forbearance is capitalized at the expiration of the respective period.⁷³ However, if However, interest that accrues during specified periods of administrative forbearance is not capitalized at the end of the administrative forbearance.85 If during the period of deferment or forbearance a borrower was repaying according to either of the IBR plans or the PAYE repayment plan and was experiencing a partial financial hardship, any interest that accrued during the period of deferment or forbearance will wil not be capitalized so long as the borrower continues to have a partial financial hardship.⁷⁴
• 86  Default. Any unpaid interest that has accrued on a borrower'’s loan prior to the borrower defaulting (e.g., during periods of negative amortization, during delinquency) is capitalized at the time of default.

Limit on Interest Capitalization in the IDR and Alternative Repayment Plans

For borrowers who are repaying their loans according to some of the IDR plans or an alternative repayment plan, the amount of interest that may be capitalized is capped. For borrowers repaying 84 Under the IBR and PAYE repayment plans, a borrower is determined to have a partial financial hardship if the total annual payments for all of his or her eligible loans, as calculated according to a standard 10 -year repayment period, are greater than a specified percentage (15% or 10%) of the borrower’s income that is in excess of 150% of the poverty guideline applicable to his or her family size. For additional information, see the discussion of the IBR and PAYE repayment plans in the “ Income-Driven Repayment (IDR) Plans” section. 85 T he administrative forbearance must have been granted (for up to 60 days) for purposes of processing a borrower’s request for deferment, forbearance, a change in repayment plan, or loan consolidation. As interest is not accruing on loans during the COVID-19 loan payment suspension period (in practice, ED has placed loans in administrative forbearance), it cannot be capitalized at the end of the period. 86 34 C.F.R. §§685.209(a)(2)(iv) and 685.221(b)(4). Congressional Research Service 27 link to page 34 link to page 97 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program is capped. For borrowers repaying their loans according to the ICR plan, the PAYE repayment plan, or the alternative repayment plans, interest may be capitalized until the outstanding principal balance reaches a maximum of 110% of the amount of the OPB owed at the time the borrower entered repayment.⁷⁵87 Once the limit is reached, interest will wil continue to accrue and accumulate, but it will wil no longer be capitalized as long as the borrower remains in the same repayment plan.

Loan Origination Fees

Loan origination fees are charged to borrowers of Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. No fees are charged to borrowers of Direct Consolidation Loans. These fees help offset federal loan subsidy costs by passing along some of the costs to borrowers.⁷⁶88 Loan origination fees are calculated as a proportion of the loan principal borrowed and are deducted proportionately from the proceeds of each loan disbursement to the borrower.

The amount to be charged for loan origination fees is specified in statute. For Direct Subsidized Loans and Direct Unsubsidized Loans made on or after July 1, 2010, the HEA specifies a loan origination fee of 1%. (Higher loan origination fees were charged on loans made prior to July 1, 2010.) Since the inception of the Direct Loan program, the HEA has specified a loan origination fee of 4% for Direct PLUS Loans.

During periods when a budget sequestration order that applies to direct (or mandatory) spending programs is in effect, such as for the Direct Loan program, special rules apply to loan origination fees.⁷⁷89 In instances where the first disbursement of a loan is made during a period that is subject to a sequestration order, the loan origination fee is required to be increased by the uniform percentage sequestration amount that is applicable to nondefense, mandatory spending programs. Loan origination fees that apply to loans made during FY2019 and FY2020FY2021 and FY2022 (periods of budget sequestration) are presented below inin Table 3. A history of loan origination fees that previously applied to loans made through the Direct Loan program is presented inin Appendix C in Table C-5.

Student Aid, Electronic Announcement GENERAL-21-31, “FY22 Sequester-Required Changes to the Title IV Student Aid Programs,” May 17, 2021, 87 34 C.F.R. §§685.208(l)(5) and 685.209(a)(2)(iv)(B) and (b)(3)(iv). 88 When the Direct Loan program was established, the terms and conditions of loans were designed to be substantially similar to those of loans that were being offered through the FFEL program. At that time, borrowers of FFEL program loans were responsible for paying a loan origination fee and a default fee (which at one time had been referred to as a loan insurance fee). In the Direct Loan program, the loan origination fee was initially set at 4%, which equaled the sum of the FFEL loan origination fee and the FFEL default fee. 89 For additional information on how budget sequestration affects federal student loans, see CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules, archived. Congressional Research Service 28 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program https://fsapartners.ed.gov/knowledge-center/library/elect ronic-announcements/2021-05-17/fy-22-sequester-required-changes-title-iv-student-aid-programs-ea-id-general-21-31. Loan Repayment Loan Repayment

Borrowers are required to make payments on loans made through the Direct Loan program during a repayment period that, depending on the loan type, commences either upon the loan being fully disbursed (Direct PLUS Loans and Direct Consolidation Loans made on or after July 1, 2006) or after a six-month grace period (Direct Subsidized Loans, Direct Unsubsidized Loans, and pre-July 1, 2006, Direct Consolidation Loans). Borrowers are afforded the opportunity to choose from among a selection of numerous loan repayment plan options to repay their loans. The repayment plan selected is a determining factor in the duration of the repayment period. Borrowers may prepay all al or any part of a loan made through the Direct Loan program at any time without being subject to a prepayment penalty.

Grace Period

A grace period is a six-month period beginning immediately after a borrower of a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a pre-July 1, 2006, Direct Consolidation Loan first ceases to be enrolled in an eligible program on at least a half-time basis. The grace period excludes any period of up to three years during which a borrower who is a member of a reserve component of the Armed Forces is calledcal ed or ordered to active duty for a period of more than 30 days and thus ceases to be enrolled on at least a half-time basis, as well wel as any additional period necessary for such a borrower to resume enrollment at the next available regular enrollment period.

The grace period is distinct from and not part of the repayment period. A loan on which a grace period is provided does not enter repayment status until the day after the grace period ends. If a borrower desires to enter repayment on loans that have a grace period immediately after completing school or ceasing to be enrolled on at least a half-time basis, he or she may consolidate those loans into a Direct Consolidation Loan during the grace period and enter repayment on the Direct Consolidation Loan upon its disbursement.⁷⁸

90 Loan Repayment Period

In the Direct Loan program, the repayment period is the period during which borrowers are obliged to repay their loans. The repayment period for Direct Subsidized Loans, Direct Unsubsidized Loans, and pre-July 1, 2006, Direct Consolidation Loan begins the day after the grace period ends. Thus, for these types of loans the loan repayment period begins six months and one day after the borrower first ceases to be enrolled in an eligible program on at least a half-time basis. The repayment period for Direct PLUS Loans and Direct Consolidation Loans made on or after July 1, 2006, begins the day the loan is fully disbursed. (This would be the day of the last disbursement if the loan has multiple disbursements.) For all al loan types, the first payment is due no later than 60 days after the start of the repayment period.

In general, the repayment period excludes any periods of authorized deferment and forbearance; however, in certain instances of a borrower repaying a loan according to an IDR plan, periods 90 U.S. Department of Education, Office of Federal Student Aid, Public Service Loan Forgiveness Questions and Answers, “ Can I waive the six-month grace period on my Direct Subsidized Loans and Direct Unsubsidized Loans and begin making qualifying PSLF payments early?”, https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/questions#qualifying-payments, accessed May 17, 2021. Congressional Research Service 29 link to page 37 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program during which the borrower is receiving an economic hardship deferment may be considered as part of the repayment period. In instances where a borrower has entered a period of deferment or forbearance, the next subsequent payment is due no later than 60 days after the end of the deferment or forbearance period.

Loan Repayment Plans

Borrowers may choose from among numerous loan repayment plan options to repay their loans. The available repayment plans fall fal into five broad categories: standard repayment plans, extended repayment plans, graduated repayment plans, income-driven repayment (IDR) plans, and alternative repayment plans.

The particular repayment plans available to any individual borrower may depend on the type(s) of loans borrowed, the date of becoming a new borrower, or the date of entering repayment status. In general, all al of a borrower'’s loans made through the Direct Loan program must be repaid together according to the same repayment plan. However, if a borrower seeking to repay according to one of the IDR plans has some types of loans that may be repaid according to an IDR plan and some that may not, the borrower may repay the eligible loans according to an IDR plan and the ineligible loans according to a non-IDR plan. If a borrower fails to actively select a repayment plan, he or she is placed into the standard repayment plan that is applicable to the loans.

In general, a borrower may change from one plan to another eligible plan at any time and may not change to a repayment plan that has a maximum repayment period of fewer than the number of years that the borrower'’s loans have already been in repayment status. If a borrower changes plans to any of the standard repayment plans, graduated repayment plans, extended repayment plans, or alternative repayment plans, the beginning of the applicable repayment period will be wil be measured from the date that the borrower'’s loan initially initial y entered repayment status. If a borrower changes to one of the IDR plans, the beginning of the repayment period will wil be measured from the date the borrower satisfied certain plan-specific criteria, as described below, for the applicable IDR plans.

Under the standard repayment plans, graduated repayment plans, extended repayment plans, and most alternative repayment plans, payment amounts may not be less than the amount of accrued interest that is due. Negative amortization is permitted in the IDR plans and as part of one alternative repayment plan option. Also, for loans with variable interest rates (which had been made prior to July 1, 2006), monthly payment amounts or the length of the repayment period may be adjusted under the standard repayment plans, graduate repayment plans, and extended repayment plans to take into account the effects of annual changes in the variable interest rate.

Table 4 provides a summary of selected characteristics of the various loan repayment plans that are made generally available general y available to borrowers. Following the table, the various repayment plans are described in detail.

CRS-36 link to page 43 link to page 43 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Standard Repayment Plans Standard Repayment Plans

Standard repayment plans allowal ow borrowers to make predictable, level payments on their loans over a defined period of time. Two standard repayment plans are offered.

Standard Repayment Plan with a Maximum Maximum 10-Year Term

All Al borrowers of Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans, and borrowers of Direct Consolidation Loans that entered repayment prior to July 1, 2006, may select a standard repayment plan that has a maximum repayment period of 10 years. According to this plan, borrowers make fixed monthly payments of not less than $50 over a period of 10 years; however, loans with small smal balances may be repaid in a period that is shorter than 10 years.⁷⁹

91 Standard Repayment Plan for Direct Consolidation Loans
Loans with 10-Year to 30-Year Terms

Borrowers of Direct Consolidation Loans that were made on or after July 1, 2006, may select a standard repayment plan that has a repayment period of between 10 and 30 years. Under this plan, borrowers make fixed monthly payments of not than less than $50.⁸⁰92 The duration of the repayment period is based on the combined balances of the Direct Consolidation Loan and all al other federal and private education loans owed by the borrower.⁸¹93 However, for purposes of determining the repayment period, the combined balance of the other education loans may not be greater than the balance of the Direct Consolidation Loan. Repayment periods for the Standard Repayment Plan for Direct Consolidation Loans are shown inin Table 5. (The repayment periods shown also apply to the Graduated Repayment Plan for Direct Consolidation Loans, which is discussed in a later section.)

Extended Repayment Plans

All Al borrowers of Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans may elect to repay according to an extended repayment plan. The extended repayment plans afford borrowers with large total loan balances the opportunity to make lower monthly payments in return for extending the repayment of their loans for a longer duration. By extending the repayment term, interest accrues over a longer period of time; as a consequence, a larger amount of interest is paid under an extended repayment plan than would be paid according to a standard repayment plan with a 10-year term. There are three extended repayment plans. Eligibility to select an extended repayment plan is limited based on when a borrower'borrower’s loans entered repayment and the total outstanding principal balance owed on loans made through the Direct Loan program.

Extended Fixed Repayment Plan with a Maximum 25-Year Term

This repayment plan is available to individuals who are new borrowers on or after October 7, 1998; whose loans enter repayment on or after July 1, 2006; and who have an outstanding balance of more than $30,000 on loans made through the Direct Loan program. The Extended Fixed Repayment Plan allowsal ows borrowers to make monthly payments in equal amounts over a period of 25 years from the date their loans entered repayment status.⁸²94 This results in monthly payment amounts being lower than they would be under a standard repayment plan with a 10-year term.

Extended Graduated Repayment Plan with a Maximum 25-Year Term

Like the above plan, this repayment plan is available to individuals who are new borrowers on or after October 7, 1998; whose loans enter repayment on or after July 1, 2006; and who have an outstanding balance of more than $30,000 on loans made through the Direct Loan program. The Extended Graduated Repayment Plan allowsal ows borrowers to make monthly payments that are initially initial y low and increase in amount every two years over a repayment period of 25 years from the date the borrower'’s loans entered repayment status.⁸³95 Under this plan, monthly payment amounts increase from an initial payment amount that must be at least $50 to an amount that may not be greater than three times the initial monthly payment amount.

Extended Repayment Plan with 12-Year to 30-Year Terms (Pre-July 1, 2006)

This extended repayment plan is available to borrowers of loans made through the Direct Loan program who entered repayment prior to July 1, 2006. Under this plan, borrowers make monthly payments in equal amounts over a period that may range from 12 to 30 years from the date their loans entered repayment status.⁸⁴96 The minimum monthly payment amount is $50, and the duration of the repayment term is dependent upon the outstanding principal balance of the borrower' 94 For additional details, see 34 C.F.R. §685.208(e) and U.S. Department of Education, Office of Federal Student Aid, “Repayment Plans: Extended Plan,” https://studentaid.gov/manage-loans/repayment/plans/extended, accessed May 19, 2021. 95 Ibid. 96 For additional details, see 34 C.F.R. §685.208(d). Congressional Research Service 38 link to page 45 link to page 45 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program borrower’s loans made through the Direct Loan program.97s loans made through the Direct Loan program.⁸⁵ The extension of the repayment term results in monthly payment amounts being lower than they would be under a standard repayment plan with a 10-year term. Repayment periods for the extended repayment plan, by loan amount, are shown below inin Table 6. (The repayment periods shown in this table also apply to the graduated repayment plan for borrowers who entered repayment prior to July 1, 2006, which is discussed in the next section.)

Graduated Repayment Plans

Loan repayment according to the graduated repayment plans is structured so that a borrower's ’s monthly payment amount will periodicallywil periodical y change over the course of the repayment period. In general, borrowers will wil be required to make smallersmal er payments at first and larger payments later. Monthly payment amounts may be less than $50; however, in no instance may they be less than the amount of interest that accrues. There are three graduated repayment plans. A borrower's eligibility ’s eligibility to select one of the graduated repayment plans depends on loan type and when the borrower' borrower’s loans entered repayment.

Graduated Repayment Plan with a Maximum 10-Year Term

All Al borrowers of Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans that entered repayment after July 1, 2006, may select a graduated repayment plan that has a maximum repayment period of 10 years. Under this plan, monthly payment amounts increase incrementallyincremental y every two years from an initial amount that may be less than $50 to an amount that may not be greater than three times the initial monthly payment amount.⁸⁶

Graduated Repayment Plan for Direct Consolidation Loans
with 10-Year to 30-Year Terms

98 97 In contrast to the Standard Repayment plan for Direct Consolidation Loans, amounts owed on other federal student loans and private education loans are not considered for purposes of determining the duration of the repayment term under this plan. 98 For additional details, see 34 C.F.R. §685.208(g) and U.S. Department of Education, Office of Federal Student Aid, “Repayment Plans: Graduated Plan,” https://studentaid.ed.gov/sa/repay-loans/understand/plans/graduated, accessed May 19, 2021. Congressional Research Service 39 link to page 43 link to page 45 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Graduated Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms Borrowers of Direct Consolidation Loans that were made on or after July 1, 2006, may select a graduated repayment plan that has a repayment period of between 10 and 30 years. Under this plan, monthly payment amounts increase incrementallyincremental y every two years from an initial amount that may be less than $50 to an amount that may not be greater than three times the initial monthly payment amount.⁸⁷99 The duration of the repayment period is based on the combined balances of the Direct Consolidation Loan and all al other federal and private education loans owed by the borrower. However, for purposes of determining the repayment period, the combined balance of the other education loans may not be greater than the balance of the Consolidation Loan. Repayment periods for the Graduated Repayment Plan for Direct Consolidation Loans are shown above in Table 5.

Graduated Repayment Plan with 12-Year to 30-Year Terms (Pre-July 1, 2006)

Borrowers of loans made through the Direct Loan program who entered repayment prior to July 1, 2006, may repay their loans according to a graduated repayment plan with a term that can range from 12 to 30 years. Under this plan, monthly payment amounts increase incrementally incremental y every two years from an initial amount that may not be less than either $25 or 50% of the amount that would be required under the Standard Repayment Plan with a Maximum 10-Year Term to an amount that may be no more than 150% of the amount that would be required under the Standard Repayment Plan with a Maximum 10-Year Term.⁸⁸100 The duration of the repayment term is determined based on the total outstanding principal balance of the borrower'’s loans made through the Direct Loan program. Repayment periods for this graduated repayment plan vary by loan balance, and are shown above inin Table 6.

Income-Driven Repayment (IDR) Plans

Since its establishment, the Direct Loan program has included a requirement that a repayment plan be made available to borrowers (other than to parent borrowers of Direct PLUS Loans) under which monthly payment amounts would vary according to the income of the borrower.⁸⁹ 101 For the first 15 years that the Direct Loan program was in operation, an Income-Contingent Repayment (ICR) plan fulfilledfulfil ed this requirement. Over time, additional repayment plans that served this purpose became available. Collectively, these plans have come to be referred to as income-driven repayment (IDR) plans.

Several IDR plans are currently available to borrowers: the Income-Contingent Repayment plan, the Income-Based Repayment (IBR) plan (one version of which is available to individuals who qualify as a new borrower on or after July 1, 2014, and another which is available to individuals who do not qualify as a new borrower as of that date), the Pay As You Earn (PAYE) repayment plan, and the Revised Pay As You Earn (REPAYE) repayment plan.

The IDR plans afford borrowers the opportunity to make monthly payments in amounts that are capped at a specified share or proportion of their discretionary income over a repayment period 99 For additional details, see 34 C.F.R. §685.208(h) and U.S. Department of Education, Office of Federal Student Aid, “Repayment Plans: Graduated Plan,” https://studentaid.ed.gov/sa/repay-loans/understand/plans/graduated, accessed May 19, 2021. 100 For additional details, see 34 C.F.R. §685.208(f). 101 HEA, §455(d)(1)(D). Congressional Research Service 40 link to page 47 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program that may not exceed a specified duration. Discretionary income is defined as the portion of a borrower'borrower’s adjusted gross income (AGI) that is in excess of a specified multiple of the federal poverty guidelines applicable to the borrower'’s family size. In general, a borrower'’s family size includes the borrower, the borrower'’s spouse, and the borrower'’s children, and may include other individuals individuals who both live with the borrower and receive more than half of their support from the borrower.⁹⁰102 The portion of a borrower'’s income that is below the federal poverty guideline multiple that is applicable to a particular IDR plan may be considered nondiscretionary income, or income that may be needed for purposes of meeting certain basic needs such as food and shelter. Multiples of the federal poverty guidelines that are applicable to the IDR plans are presented below inin Table 7 for family sizes of one through eight persons.

The various IDR plans are primarily distinguished by (1) the multiple (e.g., 100%, 150%) of the federal poverty guidelines used to define discretionary income, (2) the percentage of a borrower's ’s discretionary income (e.g., 10%, 15%, 20%) that is assessed as being available for purposes of making student loan payments, and (3) the maximum duration of the repayment term (e.g., 20 years, 25 years). The IDR plans also share other common characteristics that include the following:

• following:  Required certification of income and family size. The processes for determining IDR plan monthly payment amounts take into account a borrower's ’s income and family size. Consequently, on an annual basis borrowers must provide documentation of their income and must certify their family size to 102 34 C.F.R. §§685.209(a)(1(iv); 685.209(c)(1)(iii), and 685.221(a)(3). Borrowers are required to certify their family size once per year. A borrower’s children may include unborn children expected to be born during the year the borrower certifies family size. Congressional Research Service 41 link to page 80 link to page 80 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program become and remain eligible become and remain eligible for IDR plan repayment.⁹¹103 In addition, borrowers may update their income and family size at any time if either changes.
• Potential negative104  Potential negative amortization. IDR plan payment amounts are capped at no more than a certain proportion of a borrower'’s discretionary income. As a result, in some circumstances required payment amounts may be less than the amount of interest that accrues, which may lead to a borrower'’s loan(s) becoming negatively amortized.⁹²
• 105  Potential availability of loanloan forgiveness. All Al the IDR plans make available the prospect of eventual loan forgiveness if a borrower, after making payments according to one or more of the IDR plans, has been unable to fully repay his or her student loan debt by the end of the maximum repayment term.⁹³106 Payments made on defaulted loans repaid according to the IDR plans do not count toward a borrower'borrower’s eligibility for loan forgiveness.

Each of the IDR plans are described in detail below.

Income-Contingent Repayment (ICR) Plan

The Income-Contingent Repayment plan permits borrowers to make payments on eligible student loans in amounts that are determined according to procedures that take into account a borrower's ’s adjusted gross income and family size. Any loan balance that remains unpaid after 25 years of repayment according to the ICR plan and other qualified plans will wil be forgiven. Specifications for the ICR plan are established by the Secretary and are codified in regulations. An income-contingent repayment plan has been available to borrowers since the establishment of the Direct Loan program in 1994.⁹⁴

107 Eligibility. The ICR plan is available to all to al borrowers of Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans made to graduate and professional students, and Direct Consolidation Loans.⁹⁵108 Direct PLUS Loans made to parent borrowers are not eligible to be 103 U.S. Department of Education, Office of Federal Student Aid, “In come-Driven Repayment (IDR) Plan Request,” OMB No. 1845-0102. In response to the COVID-19 pandemic, ED has stated that borrowers will not be required to recertify their income through at least September 30, 2021, regardless of whether their recertification date would have happened prior to that date. U.S. Department of Education, Office of Federal Student Aid, “Coronavirus and Forbearance Info for Students, Borrowers, and Parents,” https://studentaid.gov/announcements-events/coronavirus#income-driven-repayment, accessed May 21, 2021. 104 T he Fostering Undergraduate T alent by Unlocking Resources for Education Act (the FUT URE Act; P.L. 116 -91), among other provisions, authorizes the Internal Revenue Service (with borrower approval) to disclose relevant tax return information to ED for the purpose of determining a Direct Loan borrower's eligibility for and repayment obligations under IDR plans. Authorized disclosures include (1) taxpayer identity information, (2) filing status, (3) adjusted gross income, (4) total number of claimed exemptions, (5) the number of dependents taken into account for determining the Child T ax Credit under IRC Section 24, and (6) the fact that no return was filed (if applicable). As of the publication date of this report, it appears these procedures have not yet been operationalized. 105 T o offset some of the adverse effects of negative amortization, all of the IDR plans except the ICR plan offer some form of interest subsidy to borrowers whose loans are in a period of negative amortization. 106 Forgiven, or discharged, indebtedness may be subject to being included as part of a borrower’s gross income for federal, and possibly state, income tax purposes. For additional information, see the section on “ Tax Treatment of Discharged and Forgiven Debt ” below. 107 T he ICR plan has been modified several times since the Direct Loan program was established. In general, the regulations in effect at the time a borrower selects the ICR plan govern the method for determining the borrower’s monthly payment amounts. 34 C.F.R. §685.208(k)(3). T his description is based on provisions for the ICR plan specified in current regulations. 34 C.F.R. §685.209(b). 108 T he repayment of Direct Consolidat ion Loans according to the ICR plan is not restricted based on the types of loans Congressional Research Service 42 link to page 47 link to page 47 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Direct PLUS Loans made to parent borrowers are not eligible to be repaid according to the ICR plan; however, parent borrowers of Direct PLUS Loans may qualify to repay those loans according to the ICR plan by consolidating them into a Direct Consolidation Loan. There are no specific income restrictions that limit a borrower'’s eligibility to repay according to the ICR plan.

Payment Amounts. Under the ICR plan, monthly payment amounts are calculated according to procedures that take into account factors including the outstanding loan balance at the time the borrower'borrower’s loans enter repayment status, the interest rates applicable to those loans, the amount of any unpaid accrued interest, the borrower'’s adjusted gross income (AGI) and family size, and an income percentage factor. For a married borrower who files a joint federal tax return with his or her spouse, the AGI for both spouses is used; for a married borrower who files a separate federal tax return, only the AGI of the borrower is used. Consistent with these criteria, monthly payment amounts are the lesser of

•  a monthly payment amount calculated according to a 12-year amortization schedule, multiplied by an income percentage factor that corresponds to the borrower'borrower’s AGI and tax filing status;⁹⁶109 or
•  one-twelfth of 20% of the amount by which the borrower'’s AGI exceeds 100% of the federal poverty guideline applicable to the borrower'’s family size (seesee Table 7).

Monthly payment amounts may range from $0 for a borrower with an income at or below 100% of the federal poverty guideline to amounts more than sufficient to repay the borrower'’s loans in 12 years or less. For a borrower whose calculated monthly payment results in an amount that is greater than $0 but less than $5, a minimum monthly payment amount of $5 is required. Monthly payment amounts are recalculated annuallyannual y to take into account changes (e.g., borrower AGI, the amount of any unpaid accrued interest) that may have occurred over the past year.

Joint ICR Plan Repayment for Married Borrowers. Borrowers of loans made through the Direct Loan program who are married to each other may elect to repay their loans jointly. Married borrowers must file a joint federal tax return to qualify for Joint ICR plan repayment. Under this option, the sum of the outstanding loan balances of each borrower, as of the time they elect joint repayment, is used to determine their combined monthly payment amount according to the procedures described above for the ICR plan. Payments made by married borrowers repaying jointly are applied to each borrower'’s loans in proportion to each borrower'’s share of the combined outstanding balance.⁹⁷

110 Subsidized Interest. No special interest subsidies are made available to borrowers as part of the ICR plan.

Application of Payments. Payments made by borrowers under the ICR plan are first applied to any outstanding charges or collection costs, then to outstanding interest due on the loan, and then to principal. Under the ICR plan formula, it is possible that a borrower'’s monthly payment amount may be for less than the amount of interest that has accrued since the last payment. that have been included in a Direct Consolidation Loan. 109 Income percentage factors range from 50.52% to 200%, depending on a borrower’s AGI and income tax filing status. Income percentage factors for selected AGI amounts and tax filing statuses are specified in a table published annually by ED; and for borrowers whose AGI falls between amounts listed in the table, linear interpolation is used to determine their income percent age factor. See U.S. Department of Education, Office of Federal Student Aid, “ Annual Updates to the Income Contingent Repayment (ICR) Plan Formula for 20 21—William D. Ford Federal Direct Loan Program,” 86 Federal Register, 19607-19611, April 14, 2021. 110 34 C.F.R. §685.209(b)(2). Congressional Research Service 43 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program amount may be for less than the amount of interest that has accrued since the last payment. Should this occur, interest will wil continue to accrue on the outstanding principal balance and unpaid interest that has accumulated will ; it wil be capitalized into the principal balance of the loan once per year. However, unpaid accrued interest may only be capitalized until the outstanding principal balance reaches 110% of the amount of the original principal balance as of when the borrower's ’s loan(s) entered repayment. Once the OPB has reached 110% of the original principal balance, unpaid accrued interest may continue to accumulate but will wil no longer be capitalized.

Failure to Certify Income and Family Size. To qualify and remain eligible to repay according to the ICR plan, borrowers must annuallyannual y provide certification of their income and family size to ED. Certification of income is normallynormal y satisfied by providing the borrower'’s AGI. However, if the borrower'’s AGI does not reflect his or her current income, alternative documentation of income may be provided. If the borrower fails to provide certification of income, his or her monthly payment amount will wil be recalculated to equal the amount the borrower would have paid according to the Standard Repayment Plan with a Maximum 10-Year Term, based on the amount owed at the time he or she first elected to repay according to the ICR plan. The repayment period based on the recalculated payment amount may exceed 10 years. If the borrower fails to certify his or her family size, a family size of one will wil be assumed and used for the year.

Maximum Repayment Period and Loan Forgiveness. The ICR plan has a maximum repayment period of 25 years. If a borrower repays according to the ICR plan and obtains an additional loan that is eligible to be repaid according to the plan, a new, separate repayment period will wil begin for the new loan when it enters repayment. If after 25 years of having repaid a nondefaulted loan or loans according to the ICR plan or certain other repayment plans, or having qualified for and received an economic hardship deferment, a borrower still stil has an outstanding loan balance, the remaining unpaid balance will wil be discharged (i.e., forgiven). The maximum 25-year repayment period for the ICR plan, after which loan forgiveness may be granted, includes periods during which the borrower

•  made monthly payments (including payments of $0) according to the ICR plan,
•  made monthly payments (including payments of $0) according to an IBR plan while experiencing a partial financial hardship;
•  made monthly payments, either as part of an IBR plan after no longer having a partial financial hardship or after leaving an IBR plan, in amounts calculated according to the Standard Repayment Plan with a Maximum 10-Year Term, based on the outstanding balance as of when the borrower first began repaying according to an IBR plan;
•  made monthly payments (including payments of $0) according to the PAYE repayment plan or the REPAYE repayment plan;
•  made monthly payments according to the REPAYE Alternative Repayment plan prior to changing to an IBR plan;
•  made monthly payments on a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan according to the Standard Repayment Plan with a Maximum 10-Year Term during the portion of the maximum 10-year repayment period that remains after the borrower ceases to repay according to an IBR plan;
•  made payments on a Direct Consolidation Loan according to the Standard Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms or the Graduate Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms during the portion of the maximum 10-year to 30-year repayment period that remains after the borrower ceases to repay according to an IBR plan;
• Congressional Research Service 44 link to page 43 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  made monthly payments according to the Standard Repayment Plan with a Maximum 10-Year Term;
•  made monthly payments during periods after October 1, 2007, according to any repayment plan in amounts not less than the amount required under the Standard Repayment Plan with a Maximum 10-Year Term;
•  only for borrowers who entered repayment prior to October 1, 2007, and only if the applicable repayment term is for not more than 12 years, made payments according to the Standard Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms, the Extended Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms, or the Graduated Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms (see (see Table 5); or
•  received an economic hardship deferment.⁹⁸

;111 or  had monthly payments suspended under the COVID-19 payment suspension (see section on “COVID-19 Loan Payment Suspension”). Income-Based Repayment (IBR) Plans

The Income-Based Repayment plans permit borrowers to repay eligible student loans according to procedures that limit monthly payment amounts based on criteria that take into account a borrower'borrower’s adjusted gross income, family size, and monthly payment amount as calculated according to a standard 10-year repayment period, based on the greater of the amount owed at the time the borrower initiallyinitial y entered repayment or the amount owed at the time the borrower elects to repay according to the IBR plan. Any loan balance that remains after the maximum repayment period of the plan will wil be forgiven. There are two IBR plan versions that function similarly. They are differentiated by (1) the date used to delimit borrower eligibility (July 1, 2014), (2) the percentage of discretionary income used to determine borrower eligibility for the plan and monthly payment amounts (15% or 10%), and (3) the maximum repayment period (25 years or 20 years). The description that follows distinguishes between the two IBR plan versions as applicable.

applicable. The initial version of the IBR plan was established under the College Cost Reduction and Access Act of 2008 (CCRAA; P.L. 110-84), and on July 1, 2009, it became available to borrowers of loans made through the Direct Loan program and the FFEL program, irrespective of when an individual individual had borrowed a loan through either program. (Hereinafter, this version is referred to as the Original IBR planplan.) Amendments to the IBR plan were enacted in 2010 under the SAFRA Act (Title II of the HCERA; P.L. 111-152), and a revised version of the IBR plan was made available to individuals who, on or after July 1, 2014, became new borrowers of loans made through the Direct Loan program. (Hereinafter, this version is referred to as the IBR Plan for Post-July 1, 2014, New Borrowers.)

Eligibility. With certain exceptions, federal student loans made through both the Direct Loan program and the FFEL program are considered eligible loans for purposes of repayment according to the Original IBR plan,⁹⁹112 while only loans made through the Direct Loan program are eligible for repayment according to the IBR plan for Post-July 1, 2014, New Borrowers. In 111 34 C.F.R. §685.209(b)(3)(iii)(B). 112 For borrowers with loans made through both the Direct Loan program and the FFEL program, repayment is coordinated for those who wish to repay both types of loans according to the Original IBR plan. In such cases, payment amounts are calculated in proportion to the outstanding balance of eligible loans owed under the respective programs. Congressional Research Service 45 link to page 47 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program both cases, exceptions pertain to loans made to parent borrowers. Direct PLUS Loans and FFEL PLUS Loans that were made to a parent borrower and Direct Consolidation Loans and FFEL Consolidation Loans that that were used to repay either a Direct PLUS Loan or a FFEL PLUS Loan that was made to a parent borrower are ineligible to be repaid according to either of the IBR plans. These loans to parent borrowers are also excluded from being considered when determining a borrower'’s eligibility for IBR plan repayment. This discussion addresses the IBR plans available through the Direct Loan program.

Partial Financial Hardship. To be eligible to begin repaying according to an IBR plan, a borrower must be determined to have a partial financial hardship. The criteria for determining whether a borrower has a partial financial hardship take into account the borrower'’s federal income tax filing status (e.g., single, married filing jointly), AGI, family size, multiples of the federal poverty guidelines applicable to the borrower'’s family size, and monthly payment amounts as calculated according to a standard 10-year repayment period based on the greater of the amount owed at the time the borrower initiallyinitial y entered repayment or the amount owed at the time the borrower elects to repay according to the IBR plan.

If a borrower is single, or is married and files an individual federal tax return, he or she is determined to have a partial financial hardship if the total annual payments for all al of the borrower'borrower’s eligible loans, as calculated according to a standard 10-year repayment period, are greater than the applicable percentage (15% or 10%) of his or her discretionary income. If a borrower is married and files a joint federal tax return, he or she is determined to have a partial financial hardship if the total annual payments for all al of the eligible loans of the borrower and, if applicable, the eligible loans of the borrower'’s spouse, as calculated according to a standard 10- year repayment period, are greater than the applicable percentage of the combined discretionary income of the borrower and the borrower'’s spouse. Discretionary income is defined as the portion of a borrower'’s adjusted gross income that is in excess of 150% of the poverty guideline that is applicable to his or her family size. If the total annual payments for all al of the borrower'’s eligible loans, as calculated according to a standard 10-year repayment period, do not exceed 15% or 10% of his or her discretionary income, as applicable, the borrower is no longer considered as having a partial financial hardship.

Payment Amounts. During periods while a borrower has a partial financial hardship and repays according to an IBR plan, monthly amounts due on his or her loans may range from $0, for a borrower with an AGI that is at or below 150% of the poverty guideline, to a maximum of one-twelfth of the specified percentage factor (15% or 10%) of a borrower'’s discretionary income. For example, based on the 20192021 HHS Poverty Guidelines, 150% of the poverty guideline for a family of one in the 48 contiguous states and the District of Columbia is $18,735. (See19,320. (See Table 7.)

)  In the Original IBR plan, a single borrower with an adjusted gross income of $40,000 would have a partial financial hardship if his or her annual student loan payments were greater than $3,189.75102, or $265.81258.50 per month. ($3,189.75102 is 15% of the result of subtracting $18,735 $19,320 from $40,000.)

 In the IBR plan for post-July 1, 2014, New Borrowers, a single borrower with an adjusted gross income of $40,000 would have a partial financial hardship if his or her annual student loan payments were greater than $2,126.50068, or $177.21172.33 per month. ($2,126.50068 is 10% of the result of subtracting $18,73519,320 from $40,000.)

For a borrower whose calculated monthly payment results in an amount that is greater than or equal to $5 but less than $10, the monthly payment is set at $10. For a borrower whose calculated monthly payment results in an amount that is less than $5, the monthly payment is set at $0. Congressional Research Service 46 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Monthly payment amounts are recalculated annuallyannual y to take into account changes that may have occurred over the past year.

If a borrower who is repaying according to an IBR plan no longer demonstrates having a partial financial hardship or no longer desires to make payments based on income, he or she may remain in the IBR plan; however, the borrower'’s maximum required monthly payment amount will wil no longer be calculated according the formula described above. Nonetheless, the required payment amount may not exceed the monthly amount due, as calculated according to a standard 10-year repayment period based on the borrower'’s loan balance at the time he or she elected to begin repaying according to the IBR plan. However, in such a case the duration of the repayment period may exceed 10 years.

Joint IBR Plan Repayment for Married Borrowers. Since July 1, 2010, the IBR plan has provided for the joint repayment of loans by married borrowers who both have eligible loans and who file a joint federal tax return. Individual payment amounts are proportional to each spouse's ’s share of the couple'’s combined loan balances and combined AGI.

Subsidized Interest. As part of the IBR plans, an interest subsidy is available on subsidized loans during periods of negative amortization for a maximum of the first three years from the start of a borrower'borrower’s repayment according to an IBR plan. If a borrower'’s required monthly payment is not sufficient to cover all al of the interest that accrues on a Direct Subsidized Loan (or the subsidized component of a Direct Consolidation Loan), the portion of the accrued interest not covered by the borrower' borrower’s monthly payment is subsidized, or paid by the Secretary. Any periods during which the borrower has received an interest subsidy under either the PAYE plan or the REPAYE plan are applied toward this three-year period. However, any periods during which a borrower has received an interest subsidy while qualifying for an economic hardship deferment (during which an interest subsidy is provided on Direct Subsidized Loans and on the subsidized component of a Direct Consolidation Loan) are excluded from the three-year period.

Final y, while a loan would not be in negative amortization during the COVID-19 interest suspension period, as no interest is accruing, it is unclear whether the COVID-19 interest suspension period is excluded from the IBR three-year interest subsidy period. Application of Payments. Payments made by borrowers repaying under an IBR plan are first applied applied to interest due on the loan, then to any fees, and then to principal. If a borrower'’s required monthly payment is for an amount that is less than the amount of interest that accrues on a loan other than a Direct Subsidized Loan or the subsidized component of a Direct Consolidation Loan, or that accrues on a subsidized loan type after the three-year interest subsidy period described above, the unpaid accrued interest will wil accumulate, but not be capitalized, so long as the borrower remains in the IBR plan and continues to have a partial financial hardship. If a borrower's ’s required monthly payment is sufficient to pay the accrued interest but is insufficient to repay the amount of principal due, then the payment of any principal due in excess of the monthly payment amount owed will wil be postponed until the borrower no longer has a partial financial hardship or leaves the IBR plan. Upon a borrower either no longer having a partial financial hardship or electing to no longer repay according to an IBR plan, any accumulated accrued interest that has not been paid will wil be capitalized.

If a borrower chooses to leave an IBR plan, he or she must change to the Standard Repayment Plan that is applicable to the loans—either the Standard Repayment Plan with a Maximum 10-Year Term or the Standard Repayment Plan for Direct Consolidation Loans with 10-Year to 30-Year Terms. (The borrower may subsequently change to another repayment plan; however, he or she may not change to a repayment plan—other than a different IDR plan—that has maximum term that is less than the number of years the borrower'’s loans have already been in repayment.¹⁰⁰ Congressional Research Service 47 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program repayment.113) The monthly payment amount due on the borrower'’s loans must be calculated according to the applicable standard repayment plan based on the time remaining in the repayment period under such plan and the outstanding balance owed at the time the borrower ceased repaying according to the IBR plan. A borrower who changes from the IBR plan to a standard repayment plan must make at least one monthly payment according to the standard repayment plan before changing to another repayment plan for which the borrower may be eligible. Borrowers may request a forbearance that permits the making of a smallersmal er payment amount than otherwise would be required for purposes of making that one required monthly payment according to the Standard Repayment Plan.

Failure to Certify Income and Family Size. To qualify and remain eligible to repay according to the IBR plans, borrowers must annuallyannual y provide certification of their income and family size to ED. Certification of income is normallynormal y satisfied by providing the borrower'’s AGI. However, if the borrower'’s AGI does not reflect his or her current income, alternative documentation of income may be provided. If the borrower fails to provide certification of income, any unpaid accrued interest will wil be capitalized and his or her monthly payment amount will wil be recalculated to equal the amount the borrower would have paid according to the Standard Repayment Plan with a Maximum 10-Year Term, based on the amount owed at the time he or she first elected to repay according to the IBR plan. The repayment period based on the recalculated payment amount may exceed 10 years. If the borrower fails to certify his or her family size, a family size of one will be wil be assumed and used for the year.

Maximum Repayment Period and Loan Forgiveness. The maximum repayment period for the Original IBR plan is 25 years, whereas the maximum repayment period for the IBR plan for post- July 1, 2014, New Borrowers is 20 years. If after having repaid according to an IBR plan a borrower obtains additional loans that are eligible to be repaid according to that IBR plan, a new repayment period will wil begin for the new loans when they enter repayment. A borrower who has participated in one of the IBR plans and has satisfied any combination of the following conditions for the duration of the applicable repayment period becomes eligible to have any balance that remains at the end of the maximum repayment period forgiven:

•  made reduced monthly payments (including payments of $0) according to an IBR plan while experiencing a partial financial hardship;
•  made monthly payments in amounts calculated according to the Standard Repayment Plan with a Maximum 10-Year Term after no longer having a partial financial hardship;
•  made monthly payments on Direct Subsidized Loans, Direct Unsubsidized Loans, or Direct PLUS Loans according to the Standard Repayment Plan with a Maximum 10-Year Term, or on Direct Consolidation Loans according to the Standard Repayment Plan for Direct Consolidation Loans with 10-Year to 30- Year Terms, as applicable, after choosing to no longer repay according to an IBR plan;
•  made monthly payments according to any repayment plan in amounts not less than the amount required under the Standard Repayment Plan with a Maximum 10-Year Term;
•  made monthly payments according to the Standard Repayment Plan with a Maximum 10-Year Term based on the amount owed at the time the borrower initially initial y selected an IBR plan;
• 113 34 C.F.R. §§685.210(b)(2) and 685.221(d). Congressional Research Service 48 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program  made monthly payments (including payments of $0) according to the ICR plan, the PAYE repayment plan, or the REPAYE repayment plan;
•  made monthly payments according to the REPAYE Alternative Repayment Plan prior to changing to an IDR plan; or
•  received an economic hardship deferment.¹⁰¹

; or114  had monthly payments suspended under the COVID-19 payment suspension (see section on “COVID-19 Loan Payment Suspension”). Pay As You Earn (PAYE) Repayment Plan

The Pay As You Earn (PAYE) repayment plan is substantiallysubstantial y similar to the IBR plan for post-July 1, 2014, New Borrowers (see above). The plan permits borrowers to repay eligible loans according to procedures that limit monthly payment amounts based on criteria that take into account a borrower'’s AGI, family size, and monthly payment amount as calculated according to a standard 10-year repayment period based on the greater of the amount owed at the time the borrower initiallyinitial y entered repayment or the amount owed at the time he or she elects to repay according to the PAYE plan. For borrowers who repay according to this plan, any loan balance that remains after 20 years of repayment will wil be forgiven. The plan became available to eligible borrowers on December 21, 2012.