Origination is the process of creating a Direct Loan award in the school’s system. Before originating a Direct Loan, a school must determine the student’s or parent’s eligibility for the loan. For each Direct Loan that a school disburses to a student or parent, the school must submit a loan award record to the COD System that includes the student’s grade level, the loan period and academic year dates, the loan amount, the anticipated and actual dates and amounts of the loan disbursements, and other information. Submission of a loan award record serves as the school’s certification that it has determined the borrower’s eligibility for the loan.
A borrower’s eligibility for a Direct Loan is calculated differently than for a Pell Grant. There are no fixed tables such as the Pell Grant Payment and Disbursement Schedules that determine award amounts. The specific Direct Loan amount that a student or parent borrower is eligible to receive is determined based on various factors such as the student’s COA, expected family contribution (EFC), other EFA, and remaining eligibility under the annual and aggregate loan limits (see Chapter 4 for guidance on annual and aggregate loan limits). Some of these factors are relevant only when determining eligibility for certain types of Direct Loans.
Direct Subsidized Loans and Direct Unsubsidized Loans have annual and aggregate limits that are the same for all students at a given grade level and dependency status. You may not originate a Direct Loan for an amount that:
Exceeds the amount requested by the borrower; In the case of a Direct Subsidized Loan, exceeds the student’s COA minus the student’s EFC and EFA;In the case of a Direct Unsubsidized Loan or Direct PLUS Loan, exceeds the student’s COA minus EFA; or
In the case of a Direct Subsidized Loan or Direct Unsubsidized Loan, would cause the student to exceed the annual or aggregate limit.
See Volume 3, Chapter 3 for more information on packaging Direct Loans as part of a student’s financial aid award.
It’s important to remember that your school, not the Department, is responsible for determining a borrower’s eligibility for a Direct Loan. Schools that originate and disburse loans for ineligible borrowers, or for loan amounts that exceed loan limits or financial need, are subject to administrative actions such as a fine, limitation, suspension, and termination, as well as liabilities including repayment to the government of interest and costs it has paid on the ineligible loans.
You must originate a Direct Loan while the student is enrolled and eligible for the period of enrollment for which the loan is intended. You may not originate a loan for a period in which the student is no longer enrolled. For example, you may not originate a loan for a prior academic year that has ended, even if the student is enrolled and eligible for the current academic year. Similarly, if a student who was enrolled at least half time only for the fall and spring quarters of an academic year consisting of fall, winter, and spring quarters does not request a loan until the spring, you may not at that time originate a loan for the fall quarter.
For all Direct Loans, you must document the student’s COA, EFC, and EFA in the student’s file. This information must be made available to the Department upon request.
You must confirm that the borrower meets the definition of eligible borrower by doing the following:
Determine that the student is enrolled at least half time and making satisfactory academic progress (see Volume 1);
Review the NSLDS information on the ISIR to ensure that the student is not in default, does not owe an overpayment on a Title IV grant or loan (see Volume 1), and will not exceed the annual or aggregate loan limits (as described in Chapter 4 of this volume);
Ensure that the amount of the loan, in combination with other aid, will not exceed the student’s financial need or COA (see Volume 3, Chapter 3);
For parents receiving a Direct PLUS Loan, ensure that the student has completed a FAFSA form (review the student’s SAR/ISIR); and
Ensure that the loan disbursement dates meet cash management and disbursement requirements.For a Direct Subsidized/Unsubsidized Loan, you must also:
Determine the student’s Pell Grant eligibility and if they are eligible, include the grant in the student’s aid package;
For a Direct Unsubsidized Loan made to an undergraduate student, first determine the student’s eligibility for a Direct Subsidized Loan and if the student is eligible, include the Direct Subsidized Loan in the student’s aid package;
Ensure that the amount of the loan will not exceed the student’s annual or aggregate loan limit; andProrate the annual loan limit for an undergraduate enrolled in a program or remaining period of study that is shorter than an academic year (as described in Chapter 5 of this volume).
The COD System does not set a minimum amount for which a school may originate a Direct Loan.
The Budget Control Act (BCA) put into place an automatic federal budget cut known as the sequester. For loans made under the Direct Loan program, the sequester requires an increase in the amount of the loan fee (also known as the origination fee) that is charged to borrowers. For details on the sequester-required changes to Direct Loan origination fees, see the May 15, 2023 Electronic Announcement.
For a guide to reviewing and evaluating your procedures regarding Direct Loans, see the Direct Loans module of FSA Assessments.
The EDExpress for Windows software is a PC application that processes, packages, and manages Title IV student financial aid records, including Direct Loan origination and disbursement records. Federal Student Aid provides EDExpress at no charge to institutions. It is available for download in the Knowledge Center on the Software and Other Tools page.
It's important for schools to accurately report academic year dates and loan period dates for all types of Direct Loans to the COD System. You must also update a loan’s previously reported loan period dates or academic year dates if the borrower’s actual attendance is different from the anticipated dates that were the basis for an initial reporting to the COD System. Other examples of when you must update loan data in the COD System include:
If the borrower requests that a loan, or a disbursement of a loan, be cancelled;When the borrower does not begin attendance, or does not begin attendance on at least a half-time basis, in a payment period that was included in the originally reported loan period and you did not make any disbursements for that payment period (see Volume 3, Chapter 1 for information on payment periods);
When you determine that the borrower is not eligible to receive a Direct Loan for a payment period that was part of the originally reported loan period (for example, due to the borrower’s failure to meet Satisfactory Academic Progress standards, because the borrower has an overpayment, or because a change in circumstances makes the borrower ineligible for a subsidized loan);
When the borrower withdraws during a payment period that was included in the originally reported loan period, and as a result, the entire amount of the loan that was intended for that payment period is returned under the Return of Title IV Funds (R2T4) calculation;
For clock-hour programs, non-term credit-hour programs, and certain types of nonstandard term credit-hour program, the borrower fails to progress to the next payment period or academic year as scheduled.
If you discover that, due to an error, a student borrower has received Direct Subsidized Loan funds in excess of their financial need, and the student is still enrolled for the loan period, you must return the subsidized loan amount for which the student was ineligible and ask the student if they wish to replace the subsidized funds with a Direct Unsubsidized Loan. If the student agrees to accept the unsubsidized loan funds and they also received a Direct Unsubsidized Loan for the same loan period as the Direct Subsidized Loan, you may increase the amount of the Direct Unsubsidized Loan disbursements by the amount of the Direct Subsidized Loan that the student was ineligible to receive. If the student did not receive a Direct Unsubsidized Loan, you may originate a new Direct Unsubsidized Loan for the amount of the Direct Subsidized Loan that the student was ineligible to receive. The new Direct Unsubsidized Loan must have the same loan period and disbursement dates as the Direct Subsidized Loan.
If the student does not agree to have the excess subsidized loan funds replaced by a Direct Unsubsidized Loan, you must still return the ineligible Direct Subsidized Loan amount.
If you discover that a student received Direct Subsidized Loan funds in excess of financial need after the student is no longer enrolled for the loan period, you are not required to take any action to eliminate the excess subsidized loan amount.
If you discover that, due to an error, a student borrower who was eligible for a Direct Subsidized Loan instead received a Direct Unsubsidized Loan, you must correct the error (even if the loan period has ended) by submitting a downward adjustment to reduce or eliminate the Direct Unsubsidized Loan, as appropriate, and replacing it with the same amount of Direct Subsidized Loan funds. You may do this either by adjusting an existing Direct Subsidized Loan upwards, or, if the student does not have an existing Direct Subsidized Loan, by originating a new Direct Subsidized Loan. Replacing a Direct Unsubsidized Loan with a Direct Subsidized Loan in this circumstance does not require obtaining the student’s consent.
As explained in Volume 4, Chapter 3, an overaward exists when a student’s aid package exceeds their need or overall COA. If you discover that a student who received Direct Loans has been overawarded and your school has already received and disbursed some or all of the Direct Loan funds, you have a couple of options:
If the student’s aid package includes a Direct Unsubsidized Loan, a Direct PLUS Loan, or a nonfederal education loan, and the aid package doesn’t already apply these loans toward the student’s EFC, you may choose to adjust the aid package so that all or some part of these loans replaces the EFC, thus reducing or eliminating the overaward (for more detail and examples, see “Substituting for the EFC” in Volume 3, Chapter 3).
If you have not yet made the second or subsequent disbursement of a Direct Loan, you can reduce or cancel the second or subsequent disbursement.
If the overaward situation occurs after the full amount of a Direct Loan has been disbursed, you do not need to adjust the amount of the loan. However, you might have to adjust the aid package to prevent an overaward of Campus-Based funds or to prevent the total aid package from exceeding the student’s need.
Although a school isn’t required to return Direct Loan funds that were disbursed to the borrower (either directly or by applying them to the student's account) before the overaward situation occurred, the law doesn’t prevent your school from returning funds that were applied to the student account if you choose to do so. A borrower who receives a direct payment of loan funds is not required to repay an overawarded amount, unless the overaward was caused by the borrower’s misreporting or withholding of information.
The loan period (also referred to as the “period of enrollment”) is the period for which a Direct Loan is intended. It must coincide with an academic period established by the school for which institutional charges are generally assessed (e.g., semester, trimester, quarter, length of the student’s program, or academic year).
The loan period may not include terms in which a student is ineligible. For example, if the academic year consists of the fall, winter, and spring quarters, and a student is expected to be enrolled at least half time in the fall and spring, but not enrolled in the winter, you may not originate a loan for a loan period covering the full academic year. Instead, you must originate separate loans for the fall and spring quarters.
It’s important to define the loan period at the beginning of the loan awarding process, because the timing and amount of Direct Loan disbursements are tied to the loan period.