Source:  Common Manual policies #956, 957, and 962 of batch 141, approved by the Governing Board on April 19, 2007; Conditional Disability Discharge: Joint Consolidations, PLUS Co-Borrowers, and Disabled Endorsers dated August 2006, developed by the Department in coordination with NCHELP’s Default Aversion and Claims Standardization (DACS) subcommittee, updated and re-published in November 2006

Effective Date:  Total and permanent disability discharge requests received on or after July 1, 2007, unless implemented earlier by the guarantor.

This new policy specifies the following:

• When a co-maker or endorser may be eligible for total and permanent disability discharge of a portion of the loan or of his or her obligation to repay the loan;
• When the lender retains the loan rather than the loan being assigned to the Department of Education’s Conditional Disability Discharge (CDD) unit as part of the discharge claim process;
• How the lender should service the loan until a discharge eligibility determination is final;
• What the guarantor’s process is for co-maker or endorser discharge eligibility; and
• How the loan balance may be affected by the disabled co-maker or endorser’s final discharge.

Overview
If a co-maker of a joint Consolidation or joint PLUS loan applies for total and permanent disability discharge, the loan holder, whether the lender or the guarantor, cannot attempt to collect from the disabled borrower during the conditional discharge period but must continue servicing the loan for the non-disabled borrower. If the endorser of a PLUS loan applies for total and permanent disability discharge, the loan holder cannot attempt to collect from the endorser during the conditional discharge period but must continue servicing the loan for the borrower. In all cases, the loan holder retains ownership of the loan; the loan is not assigned to CDD because there is a remaining non-dischargeable debt. Instead, the guarantor sends CDD the information necessary for CDD to process and evaluate the disabled borrower or endorser’s request for discharge.

Co-made Consolidation loan:   If CDD determines the disabled borrower to be eligible for final discharge, the disabled borrower's underlying loans are discharged, but the disabled borrower and the non-disabled borrower are still responsible for the remaining non-dischargeable portion of the loan. If CDD determines the disabled borrower to be ineligible for discharge, both borrowers remain responsible for the entire loan.

Co-made PLUS loan:   If CDD determines the disabled borrower to be eligible for final discharge, the disabled borrower has no remaining obligation, but the non-disabled borrower is still responsible for the entire loan. If CDD determines the disabled borrower to be ineligible for discharge, both borrowers remain responsible for the entire loan.

PLUS endorser:   An endorser cannot apply for discharge until the loan holder begins pursuing the endorser for payment (i.e., the borrower becomes delinquent or defaults). If CDD determines the endorser to be eligible for final discharge, the disabled endorser has no remaining obligation to repay the loan. However, the borrower continues to be responsible for the loan. If CDD determines the disabled endorser to be ineligible for discharge, both the borrower and endorser remain responsible for the loan.

Application for Discharge
The holder of the loan, whether the lender or the guarantor, must obtain a completed Loan Discharge Application: Total and Permanent Disability form from the disabled borrower or endorser (or his or her representative), as applicable. In the case of a joint Consolidation loan, the lender must complete the Request for Reimbursement form. The lender must submit the appropriate forms to the guarantor.

Suspending Collection Activities Pending Receipt of Application for Discharge
Co-made Consolidation and PLUS loans:   If reliable information is received indicating that one of the two co-makers has become totally and permanently disabled, the lender may apply an administrative forbearance to the loan for up to 60 days until it receives certification of the disability.

PLUS endorser:   If the lender receives reliable information indicating that an endorser has become totally and permanently disabled, the lender may not apply an administrative forbearance to the PLUS loan pending receipt of the certification of disability.

Delinquency
Co-made Consolidation loan:   The lender must continue to service the non-dischargeable portion of the loan and must protect the status of the loan during the conditional discharge period so that the status does not deteriorate by becoming delinquent or more delinquent when collection resumes on the disabled borrower. This protection of status may be achieved through an alternative repayment agreement with the non-disabled borrower, by applying a forbearance or deferment to the loan if the non-disabled borrower is eligible, or by applying an administrative forbearance if the non-disabled borrower does not request an alternative repayment agreement, deferment, or forbearance.

Co-made PLUS loan:   The lender must continue to service the PLUS loan and must protect the status of the loan during the conditional discharge period so that the status does not deteriorate by becoming delinquent or more delinquent. This protection of status may be achieved through an alternative repayment agreement with the non-disabled borrower, by applying a forbearance or deferment to the loan if the non-disabled borrower is eligible, or by applying an administrative forbearance if the non-disabled borrower does not request an alternative repayment agreement, deferment, or forbearance.

PLUS endorser:   Collection activities should only be made to the borrower while endorser is in the conditional discharge period. The lender does not need to protect the status of the loan. The lender must perform the appropriate due diligence against the borrower if the loan becomes delinquent or defaults during the conditional discharge period.

Deferment Eligibility
Co-made Consolidation and PLUS loans:   The non-disabled borrower is eligible for deferment during the disabled borrower’s period of conditional discharge. The disabled borrower is not considered to be a borrower with a repayment obligation during the conditional discharge period. As such, the deferment eligibility requirement applies only to the non-disabled borrower. The application for deferment in this instance is a positive method of servicing the Consolidation or PLUS loan and preventing the increase of delinquency or default during the conditional discharge period.

A deferment based solely on the non-disabled borrower’s eligibility must be aligned with the conditional discharge period. The deferment may not begin prior to the date the lender receives the discharge application (or the notification from the guarantor in the case where the discharge application is submitted directly to the guarantor), even if the date the non-disabled borrower became eligible for the deferment is earlier. The deferment ends on the earlier of the date the lender receives notification of final determination of discharge or the date the non-disabled borrower’s deferment eligibility expires. For any delinquency prior to the start date of the deferment, the lender may apply an administrative forbearance. The administrative forbearance may not begin earlier than the date the lender receives the discharge application (or the notification from the guarantor in the case where the discharge application is submitted directly to the guarantor). In essence, the deferment and any associated administrative forbearance can cover a period less than, but never more than, the time the disabled borrower is granted a conditional discharge.

PLUS endorser:   Deferment is granted based on the borrower’s eligibility. The endorser’s eligibility for disability discharge does not impact the borrower’s ability to obtain a deferment.

Forbearance Eligibility
Co-made Consolidation and PLUS loans:   The non-disabled borrower is eligible for forbearance during the disabled borrower’s period of conditional discharge. The forbearance eligibility requirement applies only to the non-disabled borrower during the conditional discharge period. The lender must ensure the delinquency on the loan, if any, at the time the conditional discharge period begins does not worsen. The lender may grant discretionary forbearance on the loan if the ability of the non-disabled borrower to make payments is impaired during the conditional discharge period for the disabled borrower.

PLUS endorser:   Forbearance is granted based on the borrower’s eligibility. The endorser’s eligibility for disability discharge does not impact the borrower’s ability to obtain forbearance.

Administrative Forbearance
Co-made Consolidation and PLUS loans:   The lender may apply an administrative forbearance to ensure the loan does not become delinquent or that an existing delinquency does not increase during the conditional discharge period. The lender must first explore available options (e.g., alternative repayment agreements, deferments, reduced payment forbearance, or discretionary forbearance) with the non-disabled borrower prior to granting an administrative forbearance. The administrative forbearance may begin no earlier than the date the loan holder receives the discharge application (or the notification from the guarantor in the case where the discharge application is submitted directly to the guarantor) that one borrower is totally and permanently disabled. The administrative forbearance may not end later then the date the lender receives notification of the final discharge determination.

PLUS endorser:   The PLUS loan borrower is not eligible for an administrative forbearance during the endorser’s conditional discharge period.

Guarantor Determination of Discharge Eligibility
Co-made Consolidation loan:   If the guarantor determines the disabled borrower to be eligible for discharge, the guarantor pays the lender the amount that represents the disabled borrower’s portion of the joint Consolidation loan. The guarantor forwards the disability documentation to CDD for determination of the final discharge eligibility.

Co-made PLUS loan:   If the guarantor determines the disabled borrower to be eligible for discharge, the guarantor forwards the disability documentation to CDD for a determination of final discharge eligibility. The guarantor does not make a payment to the lender.

PLUS endorser:   If the guarantor determines the disabled endorser to be eligible for discharge, the guarantor forwards the disability documentation to CDD for a determination of final discharge eligibility. The guarantor does not make a payment to the lender.

The guarantor must perform the following steps in submitting the disability documentation to CDD:

1. Send the disabled borrower or disabled endorser’s discharge application, all supporting medical documentation, and a completed assignment form to Federal Student Aid’s San Francisco regional office:
   

   U.S. Department of Education
   Federal Student Aid
   ATTN: Marilyn Espinal
   50 Beale Street, Room 8633
   San Francisco, CA 94105
   
   

   In completing the assignment form, put the disabled individual’s name in Section A (Borrower Information) and the non-disabled individual’s name in Section B (Cosigner and Reference Information). Strike out the assignment language on the assignment form.
   
   
2. Label the package JOINT CONSOLIDATION, CO-MADE PLUS, or DISABLED ENDORSER, as appropriate. Joint consolidation, co-made PLUS, or disabled endorser information must be submitted individually; these types of discharge requests cannot be combined in one package.
3. Do not send payment listings or loan collateral documentation.

Notifications to Borrowers for Guarantor Approvals
Co-made Consolidation loan:   After the lender receives the payment from the guarantor, the lender must notify the disabled borrower that the applicable portion of the Consolidation loan will be submitted to the Department for a determination of discharge eligibility.

Co-made PLUS loan:   After the lender receives notification from the guarantor that the discharge application has been forwarded to CDD, the lender must notify the non-disabled borrower that the co-maker’s application has been forwarded to the Department for a determination of discharge eligibility.

PLUS endorser:   After the lender receives notification from the guarantor that the discharge application has been forwarded to CDD, the lender must notify the borrower that the endorser’s application has been forwarded to the Department for a determination of discharge eligibility.

Notification to Borrowers and Endorsers for Guarantor Denials
If the guarantor determines the disabled borrower or endorser is not eligible for discharge, the guarantor will notify the lender with an explanation of the reason for the denial. The lender must notify the borrower or endorser that the application for a disability discharge has been denied, provide the basis for the denial, and inform the borrower or endorser that the lender will resume collection activities on the loan.

NSLDS Reporting
Co-made Consolidation loans:   The lender must report the correct status of the non-dischargeable portion in a timely manner so that the guarantor can ensure accurate NSLDS reporting. NSLDS currently reports joint Consolidation loans under one primary borrower only. However, to ensure proper reporting during the conditional discharge period, the lender should report the non-dischargeable portion under the non-disabled borrower’s name and Social Security Number (SSN). If the borrower on record with NSLDS is the disabled borrower, the guarantor will update NSLDS to reflect the non-disabled borrower as the borrower of record. If the discharge is denied, the lender and guarantor may continue reporting the full balance under the borrower currently being reported. If a final discharge is granted, the lender and guarantor continue to report the non-discharged portion of the Consolidation loan under the non-disabled borrower’s name and SSN.

Co-made PLUS loans:   The lender must report the correct status of the PLUS loan in a timely manner so that the guarantor can ensure accurate NSLDS reporting. NSLDS currently reports joint PLUS loans under one primary borrower only. However, to ensure proper reporting during the conditional discharge period, the lender should report the PLUS loan under the non-disabled borrower’s name and SSN. If the borrower on record with NSLDS is the disabled borrower, the guarantor will update NSLDS to reflect the non-disabled borrower as the borrower of record. If the discharge is denied, the lender and guarantor may continue reporting the full balance under the borrower currently being reported. If a final discharge is granted, the lender and guarantor continue to report the PLUS loan under the non-disabled borrower’s name and SSN.

PLUS endorser:   Endorsers are not reported to NSLDS. The lender and guarantor continue reporting the PLUS loan under the borrower’s name and SSN. No reporting change is necessary if the discharge is granted or denied.

Credit Bureau Reporting
All credit bureau reporting must be performed by the loan holder, whether the lender or guarantor. The loan holder must report the correct status of the loan to the credit bureaus within a timely manner.

Co-made Consolidation loan:   The loan holder must report the outstanding balance of the non-dischargeable portion of the Consolidation loan with the appropriate status under the non-disabled borrower’s name and SSN. If a final discharge is granted, the loan holder continues to report the non-discharged portion of the Consolidation loan under the non-disabled borrower’s name and SSN. If the discharge is denied, the loan holder resumes regular reporting of the full balance under both borrowers’ name and SSN.

Co-made PLUS loan:   The loan holder must report the full outstanding balance of the PLUS loan with the appropriate status under the non-disabled borrower’s name and SSN. If final discharge is granted, the loan holder continues to report the PLUS loan under the non-disabled borrower’s name and SSN. If the discharge is denied, the loan holder resumes regular reporting of the PLUS loan under both borrowers’ name and SSN.

PLUS endorser:   The loan holder must report the full outstanding balance of the PLUS loan with the appropriate status under the borrower’s name and SSN. No reporting change is necessary if the discharge is granted or denied. The loan holder continues reporting the PLUS loan under the borrower’s name and SSN.

Final Discharge Granted by CDD
Co-made Consolidation loan:   If final discharge is granted by CDD, the loan holder resumes collection of the joint Consolidation loan from both the non-disabled and the disabled borrowers for the outstanding portion (excluding the amount discharged). Any payments made on the discharged portion of the loan are not refunded to the disabled borrower but must be applied to the non-discharged portion of the loan.

Co-made PLUS loan:   If final discharge is granted by CDD, the loan holder resumes collection only against the non-disabled borrower. The non-disabled borrower is responsible for the entire outstanding balance of the loan. The disabled borrower is discharged from any future responsibility to repay the loan. No payments made on the loan are refunded.

PLUS endorser:   The loan holder continues collection activities against the borrower. The borrower remains responsible for the entire outstanding balance of the PLUS loan. The disabled endorser is discharged from any future responsibility to repay the debt. No payments made on the loan are refunded.

Final Discharge Denied by CDD
Co-made Consolidation loan:   The loan holder must restore the disabled borrower’s portion of the Consolidation loan; however, no interest accrues on this portion during the conditional discharge period. If the joint Consolidation loan is held by the lender, the lender must refund to the guarantor the amount previously received from the guarantor. Collection of the full loan amount from both borrowers resumes.

Co-made PLUS loan:   The loan holder must resume collection of the loan from both borrowers for the entire balance of the PLUS loan. Since there were no financial adjustments made to the balance of the loan, none need to be reversed.

PLUS endorser:   The loan holder must resume collection of the loan from the endorser for the entire balance of the PLUS loan. Since there were no financial adjustments made to the balance of the loan, none need to be reversed.

Prior policy did not specify the applicability of total and permanent disability discharge to a Consolidation co-maker, PLUS co-maker, or PLUS endorser. Also, prior policy did not establish the effect on the non-disabled co-maker’s alternate repayment agreements, or forbearance or deferment eligibility, if a disabled co-maker is in a conditional discharge period.