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AwardYear: 1998-1999 EnterChapterNo: 11 EnterChapterTitle: William D. Ford Federal Direct Loan Program SectionNumber: 3 SectionTitle: Direct Consolidation Loans PageNumbers: 43-56 hb11-44.pdf   Direct Consolidation Loans allow Direct Loan and Federal Family Education Loan (FFEL) borrowers to combine one or more federal education loans and create one Direct Loan with one monthly payment. Borrowers can extend their repayment periods, thereby reducing monthly payments, and the interest rate may be lower. TYPES OF DIRECT CONSOLIDATION LOANS ---------------------------------------- There are three types of Direct Consolidation Loans: - Direct Subsidized Consolidation Loans, - Direct Unsubsidized Consolidation Loans, and - Direct PLUS Consolidation Loans. Subsidized SFA loans can be consolidated into a Direct Subsidized Consolidation Loan. Unsubsidized SFA loans, as well as certain loans authorized under Titles VII and VIII of the Public Health Service Act (administered by the U.S. Department of Health and Human Services), can be consolidated into a Direct Unsubsidized Consolidation Loan. Direct PLUS Loans and Federal PLUS Loans can be combined into one Direct PLUS Consolidation Loan. See the chart on the following page for a list of loans that can be consolidated into each type. Even if borrowers have loans from more than one loan type, they receive only one Direct Consolidation Loan and make just one monthly payment. However, the Department will track the parts of the Direct Consolidation Loan separately because the type of loan affects interest rates, interest subsidies, and deferment eligibility. (For example, a borrower will not be required to pay interest during a deferment on the subsidized portion of a Direct Consolidation Loan.) [[This file contains the chart "Federal Education Loans Eligible for Direct Loan Consolidation" on page 11-44 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]] Borrowers must consolidate at least one Direct Loan or FFEL1 but generally are not required to consolidate all their outstanding federal education loans. For example, a borrower may choose not to consolidate a loan with an interest rate lower than a Direct Consolidation Loan's interest rate. A borrower may not, however, exclude SFA loans in default unless he or she has met the requirements for regaining SFA loan eligibility (see Section 2). Nonfederal loans made by state or private lenders are not eligible for consolidation. 1 "Consolidating" one loan is generally done so the borrower can receive a lower interest rate or other Direct Loan Program repayment benefit. LOAN LIMITS ------------- There are no minimum or maximum loan limits that apply to Direct Consolidation Loans. A Direct Consolidation Loan's principal balance equals the sum of the amounts the Department pays to the holders of the loans being consolidated. The Department pays each holder the amount necessary to pay in full the loan being consolidated. Consolidation does not increase a borrower's aggregate loan limits (see Section 2 for a discussion of loan limits). The aggregate limit for undergraduate and graduate/professional students must include any portion of a Direct Consolidation Loan used to repay a Direct Subsidized or Unsubsidized Loan, a subsidized or unsubsidized Federal Stafford Loan, or a Federal Supplemental Loans for Students (SLS) Loan. INTEREST RATES ---------------- Direct Consolidation Loan interest rates are variable and adjusted annually on July 1. Interest rates are determined on June 1 each year and apply to the following 12-month period from July 1 to June 30. [[Subsidized/Unsubsidized]] Currently, there are two formulas for calculating the variable interest rate for Direct Subsidized and Unsubsidized Consolidation Loans: - For loans first disbursed between July 1, 1995 and June 30, 1998 that are in in-school, grace, or deferment periods, the interest rate equals the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction before June 1, plus 2.5 percentage points. The rate for these loans for July 1, 1997 through June 30, 1998 is 7.66%. - For loans first disbursed between July 1, 1995 and June 30, 1998 that are not in in-school, grace or deferment periods, the interest rate equals the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction before June 1, plus 3.1 percentage points. The maximum interest rate is 8.25%. The rate for these loans for July 1, 1997 through June 30, 1998 is 8.25%. Note that this formula also applies to any Direct Subsidized and Unsubsidized Consolidation Loan first disbursed before July 1, 1995, in ANY period. [[PLUS]] Currently, the interest rate for Direct PLUS Consolidation Loans equals the bond equivalent rate of the 52-week Treasury bills auctioned at the final auction before June 1, plus 3.1 percentage points. The maximum interest rate is 9%. The rate for these loans for July 1, 1997 through June 30, 1998 is 8.98%. [[Change in interest rate calculations]] Beginning July 1, 1998, interest rate calculations change. For Direct Subsidized and Unsubsidized Consolidation Loans first disbursed on or after July 1, 1998, the interest rate will equal the bond equivalent rate of the security with a comparable maturity, that the Department establishes, plus 1 percentage point. The rate will still be determined on June 1 each year and apply to the following 12-month period from July 1 to June 30. The rate will not exceed 8.25%. This interest rate calculation applies whether or not a loan is in an in-school, grace or deferment period. The calculation also applies to Direct PLUS Consolidation Loans first disbursed on or after July 1, 1998, except the rate will equal the bond equivalent rate of the security with a comparable maturity, as established by the Department, plus 2.1 percentage points. The rate will not exceed 9%. Specific information on which securities' bond equivalent rates will be used was not available at the time this Handbook went to print. The Department will issue further guidance on this topic at a later date, in the form of a "Dear Colleague" Letter. When issued, this up-to-date information will also be available on the SFA BBS. During in-school, grace, and deferment periods, the Department does not charge borrowers interest on Direct Subsidized Consolidation Loans. Interest is charged during forbearance, however. Interest is charged on Direct Unsubsidized Consolidation Loans and Direct PLUS Consolidation Loans during all periods. Borrowers may pay the interest for which they are responsible during applicable periods or postpone paying it and have the interest capitalized (added to the principal owed). See Section 2 for a discussion of capitalizing interest. ADDITIONAL BORROWING COSTS ------------------------------ [[No loan fee charged]] Borrowers are not charged a loan fee for consolidating their loans. [[Late fees]] The Department can charge late fees on all or part of any payments the borrower does not pay within 30 days of the due date. The late charge may not exceed six cents for each dollar of each late installment. Currently, however, the Department is not charging late fees. [[Collection costs]] On a Direct Consolidation Loan not in default, the Department may require the borrower or endorser to pay any costs, in excess of routine collection costs, incurred in collecting installments not paid when due. Such charges do not include the routine costs of preparing letters or notices or making local or long-distance telephone calls. An example of a non-routine collection cost is the cost of processing checks returned for insufficient funds. On a Direct Consolidation Loan in default, the Department may require the borrower or any endorser to pay additional costs. ELIGIBILITY ------------- [[Applying]] Borrowers must send a Direct Consolidation Loan application to the Department's Loan Origination Center. A single consolidation application is used, even if the borrower is consolidating more than one type of loan, such as subsidized student loans and unsubsidized student loans or subsidized student loans and PLUS Loans (if the borrower has a loan for his or her dependent student as well as a loan for him- or herself). The publication Direct Consolidation Loans: A Guide explains the application process in detail. Borrowers may add pre-existing eligible loans to a newly created Direct Consolidation Loan without submitting a new application; borrowers simply submit a request to the Department within 180 days after the loan is originated (see "Subsequent Consolidation" on page 11-52). The two types of consolidation, "regular" and "in-school," are discussed below. Basically, however, borrowers may consolidate loans any time after they are fully disbursed. Note that married borrowers may consolidate jointly. Borrowers in default also are permitted to consolidate under certain circumstances (see page 11-51). Consolidation eligibility criteria vary somewhat depending on when borrowers consolidate and whether they are in default. All Direct Consolidation Loan borrowers, however, receive the same deferment, forbearance, and discharge provisions available to borrowers of other Direct Loans (see Section 2). Note that a borrower who consolidates a loan that is in deferment must reapply for the deferment once the loan is consolidated. [[Definition of in-school period]] Many borrowers consolidate when their loans are no longer in an in- school period, defined as the period before a loan enters the grace period while a borrower is enrolled at least half time at an eligible school. A loan is also considered to be in an in-school period if the borrower entered but never completed the grace period because the borrower reenrolled at least half time at an eligible school before the grace period expired. Regular Consolidation Borrowers consolidating at least one fully disbursed Direct Loan or FFEL, none of which is in an in-school period,2 may consolidate under what is known as the regular Direct Consolidation Loan process. Borrowers may also include other student loans, such as Federal Perkins Loans and eligible health professions student loans (see the chart on page 11-44). (The status of the Direct Loan or FFEL to be consolidated determines whether the borrower has a regular or an in-school consolidation loan.) 2 Do not confuse "in-school period" with the borrower's enrollment status. A borrower can be enrolled in an eligible school at least half time and still consolidate under the regular Direct Consolidation Loan process. For example, a borrower who enrolled full time in an eligible school but had two FFELs in repayment before enrolling would qualify under the regular consolidation process. It is the status of the loans being consolidated that must be considered. [[Borrowers with no Direct Loans]] A borrower with an outstanding FFEL but no outstanding Direct Loan must meet one of two conditions to receive a regular Direct Consolidation Loan: The borrower must be unable to obtain a Federal Consolidation Loan after checking with a lender that makes such loans; or, if the borrower is eligible for the Income Contingent Repayment Plan (see Section 2), he or she must be unable to obtain a Federal Consolidation Loan with acceptable income-sensitive repayment terms after checking with a lender that makes Federal Consolidation Loans. [[Married borrowers consolidating jointly]] For married borrowers who want to consolidate jointly, only one borrower must meet the conditions described in the preceding paragraph. Joint consolidators are held jointly and severally liable for their consolidation loan, however. Both borrowers must qualify for deferment, forbearance, and discharge, unless a discharge is due to school closure or false certification. In those two cases, only one borrower has to qualify; however, only the portion of the Direct Consolidation Loan affected by the school closure or false certification can be discharged. Nicholas receives two FFELs while attending Asta Institute. Nicholas withdraws from Asta, enrolls in Fribitz Institute, and takes out another FFEL. He and his wife Nora decide to consolidate her Direct Loans and his FFELs into a joint Direct Consolidation Loan. Fribitz closes three months later. Nicholas is eligible to have his FFEL at Fribitz canceled, but he and Nora will continue to be responsible for his other two FFELs that are part of the Direct Consolidation Loan--those loans are unaffected by Fribitz's closure. TIP: Counsel married borrowers to decide carefully about joint consolidation. If one spouse dies or becomes totally and permanently disabled, for example, the other spouse is responsible for paying the entire consolidation loan. The loan would be discharged for a single borrower in such situations. Each spouse may want to consolidate separately to minimize risk. Regular consolidation requires that borrowers (both borrowers, if married and consolidating jointly) have no federal consolidation loan applications pending with any other lenders (for example, a FFEL Program lender). Also, borrowers must agree to notify the Department of any address change. [[No grace period]] A regular consolidation loan's repayment period begins the day the first disbursement is made; the first payment is due within 60 days of that date, unless the borrower is in deferment on the consolidation loan. There is no grace period. [[Payments to original loan holders]] Borrowers in repayment on any loans to be consolidated should continue making payments to their current loan holders until receiving written notice from the Department that it has consolidated their loans. Once the loans are consolidated, any payments a borrower makes to the original holders will be sent to the Department to reduce the Direct Consolidation Loan balance. In-School Consolidation In-school consolidation requires borrowers to meet the requirements for regular consolidation, with some exceptions. Unlike regular consolidation, borrowers eligible for in-school consolidation may consolidate only Direct Loans or FFELs; the other types of federal education loans listed in the chart on page 11- 44 may be consolidated only after borrowers leave school. Borrowers attending Direct Loan schools must consolidate at least one fully disbursed Direct Loan or FFEL that is in an in-school period (see the definition of in-school period on page 11-47). Borrowers attending non-Direct Loan schools must have a Direct Loan and must consolidate a Direct Loan or FFEL that is in an in- school period. (Note that borrowers can qualify simply by consolidating one Direct Loan that is in an in-school period.) Married borrowers who wish to consolidate jointly must both have Direct Loans or FFELs in in-school periods. If a married borrower attends a Direct Loan school but the spouse attends a non-Direct Loan school, the spouse must have a Direct Loan and must consolidate a FFEL or Direct Loan in an in-school period. (The spouse can qualify simply by consolidating one Direct Loan that is in an in-school period.) Borrowers with no Direct Loans who want to consolidate FFELs must be attending Direct Loan schools. (At least one FFEL must be in an in-school period.) Such borrowers do not have to certify that they have been unable to obtain Federal Consolidation Loans--FFEL borrowers currently are not permitted under the Federal Consolidation Loan Program to consolidate a loan in an in-school period. The examples on the next page show how in-school consolidation works. IN-SCHOOL CONSOLIDATION EXAMPLES - Emma is in her third year at Woodhouse College (a Direct Loan school). She is a three-quarter-time student and wants a Direct Consolidation Loan for the two FFELs she received for the previous two years at a different school. The two FFELs have not yet entered repayment. Emma has no Direct Loans at Woodhouse. Emma is eligible to receive a Direct Consolidation Loan for her FFELs because she is attending a Direct Loan school and has a fully disbursed FFEL in an in-school period. - Elizabeth is in her first semester at Bennet University (a Direct Loan school) and is enrolled full time. Elizabeth has three FFELs she received before she transferred to Bennet (these loans are still in an in-school period) and a Direct Loan she has received at Bennet. She will receive the second disbursement of her Direct Loan in her second semester. Elizabeth wants to consolidate all four loans for convenience. Elizabeth can receive a Direct Consolidation Loan only for the three FFELs. The Direct Loan cannot be included because it has not been fully disbursed. She may want to apply for consolidation after her Direct Loan is fully disbursed so that all four loans can be consolidated. - Robert has a Direct Loan he received two years ago at Huntingdon College. He had been repaying that loan before enrolling at Locksley Institute, where he has been attending full time for two years. He has an in-school deferment for his Direct Loan. He received a FFEL for his first year of attendance at Locksley, which does not participate in Direct Loans. He would like to receive a Direct Consolidation Loan for both loans. Robert may receive a Direct Consolidation Loan for both loans. He has a Direct Loan (the fact that the loan is not in an in-school period does not matter), and he has a FFEL in an in-school period. - Diana attended Trundle University her first two years of school but has transferred to National College (a Direct Loan school) and is enrolled less than half time. She has two FFELs she received from Trundle. Diana wants to receive a Direct Consolidation Loan for the FFELs because the interest rate would be more advantageous. Diana cannot receive an in-school Direct Consolidation Loan because she does not have at least one Direct Loan or FFEL in an in-school period (her enrollment as a less-than-half-time-student means her loans are not in an in-school period). Diana could qualify for a regular Direct Consolidation Loan if, after checking with a FFEL lender that makes Federal Consolidation Loans, she cannot receive such a loan or cannot receive one with acceptable income-sensitive repayment terms. - Allen graduated from Hart University with a degree in Biology. He received two FFELs during his attendance. Three months after graduation, he enrolls at Sarven Technical Institute as a three-quarter-time student to pursue a degree in Zoology. Sarven is a Direct Loan school, but he has not taken out a Direct Loan. He would nevertheless like to receive a Direct Consolidation Loan for his FFELs because the repayment terms would be more favorable. Allen may receive a Direct Consolidation Loan for his FFELs. The loans are considered to be in an in-school period because Allen has reenrolled in school at least half time after only three months of his grace period have expired. [[Grace period]] The borrower of an in-school Direct Consolidation Loan receives a six-month grace period on the loan when he or she reduces enrollment to less than half time at an eligible school. If the underlying loan(s) that is in an in-school period enters the grace period after the Direct Consolidation Loan application's submission but before the consolidation loan's first disbursement, borrowers do not have to make payments on the loan for the amount of time remaining in the grace period at the time of the first disbursement. On September 1 of his senior year at Gibbs College, a Direct Loan school, Joseph applies for an in-school Direct Consolidation Loan for two FFELs he has received. Two weeks after he applies, he drops below half-time attendance. Joseph has not received his first Direct Consolidation Loan disbursement. He receives the first disbursement in early December. By that time, he has used 2 1/2 months of his grace period. Joseph has 3 1/2 months left in his grace period before he must begin repayment on his Direct Consolidation Loan. PLUS Loan Consolidation A parent who wants to consolidate Direct PLUS or Federal PLUS loans must have at least one Direct PLUS Loan or have at least one Federal PLUS Loan and have been unable to obtain a Federal Consolidation Loan.3 The borrower must pass a credit check or must either document extenuating circumstances or obtain an endorser who can pass a credit check. (See Section 2 for more information on these topics.) If married borrowers are consolidating PLUS loans jointly, only ONE borrower needs to pass a credit check. 3 A parent borrower is not eligible for a Direct Consolidation Loan based on being unable to obtain a Federal Consolidation Loan with acceptable income-sensitive repayment terms--Direct PLUS Loan borrowers are not eligible for the Income Contingent Repayment Plan. Consolidating Defaulted Loans Generally, defaulted student loans may be consolidated if borrowers agree either to repay the Direct Consolidation Loan under the Income Contingent Repayment Plan or make satisfactory repayment arrangements with the current loan holder.4 However, the borrower has only ONE option--to make satisfactory repayment arrangements with the current loan holder--in the following two situations: - The borrower has a defaulted loan and at least one Direct Loan or FFEL in an in-school period and wants an in-school consolidation loan, or - The borrower wants to consolidate a defaulted PLUS Loan. 4 A borrower with student loans who does not have a Direct Loan must be unable to obtain a Federal Consolidation Loan or be unable to obtain one with acceptable income-sensitive repayment terms. [[Satisfactory repayment]] For purposes of consolidating a defaulted Direct Loan, FFEL, or Perkins Loan, satisfactory repayment arrangements are defined as three consecutive, voluntary, on-time, full monthly payments that are reasonable and affordable given the borrower's total financial situation. Borrowers eligible to consolidate defaulted health professions loans must contact the loan holders to determine how a satisfactory repayment arrangement is defined. [[Excluding defaulted loans]] Borrowers may not exclude a defaulted SFA loan from consolidation unless they have made repayment arrangements satisfactory to regain SFA eligibility. For Direct Loans and FFELs, these arrangements are the same as those described above, except borrowers must make SIX payments instead of three. For Perkins Loans, borrowers must repay the loan in full or sign a new repayment agreement and make one payment each month for six consecutive months. Note that regaining SFA eligibility does not apply if only health professions loans are in default. [[Collection costs for defaulted loans]] For defaulted Direct Loans and FFELs, collection costs up to a maximum of 18.5% of the outstanding principal and interest may be added to the outstanding principal loan balance. For defaulted Perkins Loans and health professions loans, collection costs equal to the amount the borrower owes may be added to the outstanding principal loan balance. [[Judgments]] In general, a borrower may not consolidate any loan on which a judgment has been obtained. For example, a borrower with a judgment on a defaulted Direct Loan, FFEL, or Perkins Loan who makes satisfactory repayment arrangements on the judgment for purposes of regaining SFA eligibility may still not include the judgment in a Direct Consolidation Loan. A borrower with a judgment on a health professions loan who is not in default on any SFA loan may consolidate all loans except the judgment. Note that borrowers who have judgments on Direct Loans or FFELs but who rehabilitate those loans may include them in a Direct Consolidation Loan. (See Section 4 for a discussion of rehabilitation.) Rehabilitation is NOT an option for Perkins Loans and health professions loans. SUBSEQUENT CONSOLIDATION ---------------------------- A borrower may add pre-existing eligible loans to a Direct Consolidation Loan within 180 days after the date the Direct Consolidation Loan is made. A pre-existing eligible loan is one fully disbursed before the Direct Consolidation Loan's first disbursement is made. A borrower who listed the pre-existing loan as an outstanding debt on the consolidation application may telephone the Loan Origination Center to request that the loan be added. A borrower who did not list the loan must submit a brief written request that includes the loan information the consolidation application requires. After the Department verifies the additional loan, the borrower must sign a promissory note for the additional amount before the Department will pay off the holder. The loan disclosure issued when the subsequent consolidation is completed will include the balance of the newly consolidated loan. If the original Direct Consolidation Loan required an endorser on the PLUS portion of the loan and the borrower is adding a PLUS loan, the same endorser must be used for the added PLUS loan. If an endorser was not originally required but is required for the added PLUS Loan, the endorser must agree to repay the ENTIRE Direct PLUS Consolidation Loan. A borrower who wants to consolidate additional eligible loans after 180 days must complete a new Direct Consolidation Loan application. REPAYMENT ----------- As mentioned earlier, a regular Direct Consolidation Loan's repayment period begins the day the loan is first disbursed. If a Direct Consolidation Loan includes at least one Direct Loan or FFEL that is in an in-school period at the time the Department receives the consolidation application, the repayment period begins the day after the grace period ends. The first payment on a Direct Consolidation Loan is due within 60 days of the loan's first disbursement, unless a borrower is eligible for a deferment or the loan includes at least one Direct Loan or FFEL in an in-school period and therefore qualifies for a grace period. [[Repayment plans]] Direct Loan repayment plans and their requirements also apply to Direct Consolidation Loans. See Section 2. Borrowers may not choose the Income Contingent Repayment Plan for Direct PLUS Consolidation Loans. Borrowers with these loans may have two repayment plans if they want to repay their Direct Subsidized Consolidation Loans and/or Direct Unsubsidized Consolidation Loans under the Income Contingent Repayment Plan. [[Repayment period length]] The length of a Direct Consolidation Loan repayment period under each plan is the same as for non-consolidated Direct Loans. See Section 2 for a list of the plans' maximum repayment periods. Section 2, page 11-31, shows the repayment period for the Extended and Graduated repayment plans, based on the borrower's outstanding loan balances. For Direct Consolidation Loans, outstanding balances consist of all the borrower's Direct Consolidation Loans, Direct Loans, and other education loans not made by an individual and not in default (unless satisfactory repayment arrangements have been made [see Section 2]). The total outstanding balance for the other education loans used to determine an Extended or Graduated repayment period may not exceed the amount of the Direct Consolidation Loan. [[Repayment schedule]] The Department forwards a repayment schedule to the Direct Consolidation Loan borrower before the first installment payment is due. The schedule presents the borrower's monthly repayment under the repayment plan selected. If a borrower then adds an eligible loan to the consolidation, the Department adjusts the monthly repayment amount (and, if necessary, the repayment period for loans in Graduated or Extended repayment plans). [[Switching plans]] As is true for Direct Loans, a borrower who decides the repayment plan selected for the Direct Consolidation Loan no longer meets his or her needs can switch plans by calling or writing the Direct Loan Servicing Center--as long as the new plan's maximum repayment period is longer than the period the borrower's loan has already been in repayment. A borrower who had a defaulted loan and became eligible for a Direct Consolidation Loan by agreeing to repay it under the Income Contingent Repayment (ICR) Plan may switch to a plan other than ICR if he or she - was required to make, and did make, a payment under ICR in each of the prior three months; or - was not required to make payments but made three reasonable and affordable payments in each of the prior three months. In either case, a borrower must call or write the Direct Loan Servicing Center to receive permission to make such a switch. HOLDER RESPONSIBILITIES --------------------------- When a borrower wishes to consolidate a FFEL or other non-Direct Loan, the loan holder must certify the loan amount and forward that information to the Department within 10 business days of receiving the Department's request for loan information. A loan holder that is unable to provide the certification must explain the reason in writing to the Department. The holder must promptly use the Direct Consolidation Loan proceeds received from the Department to discharge fully the borrower's obligation on the loan that has become consolidated. - If the amount the Department pays exceeds the amount owed, the loan holder must refund the excess to the Department to be credited against the outstanding balance of the Direct Consolidation Loan. - If the amount the Department pays is insufficient to pay off the loan, the holder must notify the Department in writing of the amount due so that the remainder can be paid. The holder also is responsible for notifying the borrower that the original loan has been paid in full. [[Refunds from schools]] If a holder of a loan that was consolidated receives a refund from a school on that loan, the holder must transmit the refund to the Department within 30 days of receipt. The holder must include an explanation of the refund source.

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