Providing Clarity on Direct Loan Inadvertent Overpayments

By Luke Hoey, FAAC® | March 6, 2021

Along with wide-ranging overhauls and easy-to-implement changes to regulations surrounding Title IV programs, the Department of Education (ED) annually makes more subtle changes or additions that can pass under the radar. Big or small, any alteration to the Federal Student Aid Handbook matters.

To that end, recently while we were identifying a finding for a client, a clarification that was newly added to the 2020-21 Handbook came into play. Related to inadvertent overpayments, the clarification deserves attention from financial aid administrators.

In the finding, a student’s unsubsidized Direct Loan disbursed after their last date of attendance (LDA), but the school treated it as aid disbursed, rather than aid that could have been disbursed, which contradicts the “Treatment of inadvertent overpayments” section in Volume 5, Chapter 2 of the Handbook.

In this scenario, the student earned 100% of the unsubsidized loan, but we pointed out that the overpayment should have been offered as a post-withdrawal disbursement (PWD), as it technically was aid that could have been disbursed. However, while normally a school would have to attempt to have the student authorize a PWD of Direct Loan funds, we discovered  new language in the 2020-21 Handbook which states, “an institution is not required to obtain the student’s permission (post-withdrawal disbursement confirmation) to retain the amount of inadvertently overpaid Direct Loan funds that the R2T4 calculation indicates that the student has earned and that could have been disbursed as post-withdrawal disbursement.”

Keep in mind that before students with Direct Loans can receive a late disbursement, ED must have processed a Student Aid Report/Institutional Student Information Record with an Expected Family Contribution. A loan record also must be originated (the date of origination is when the institution creates the electronic loan origination record in its computer system).

There are also limitations that institutions must satisfy before they can make a late disbursement. For all Title IV programs, the school must have received a valid SAR/ISIR by the date ED establishes in its annual deadline date notice. When it comes to Direct Loans, there are two other limitations to satisfy:

  • Students who are first-time, first-year borrowers must have completed 30 days of the program (subject to some waivers).
  • For a second or subsequent disbursement, borrowers have successfully completed the period for which the loan was intended.

When it comes to overpayments and late disbursements, it is easy to make a minor mistake that leads to a finding, particularly if a given regulation is not as clear as it could be. When the guidelines appear ambiguous or confusing, McClintock & Associates is here to help. Schedule a time to chat — before it’s too late.

Still have questions about overpayments and late disbursements?

Reach out and let us know how we can help.