Summary: Update #3 Direct Consolidation Loans
Author: OPE - Office of the Assistant Secretary for OPE
Posted October 15, 1997
Subject: Differences between FFEL and Direct Loan Consolidation
In my recent messages concerning the status of Federal Direct Consolidation Loan
applications, I have provided information about the applications we currently have on
hand, and our progress in processing those applications. Because most borrowers
decide to consolidate after they are no longer in school, I know from my own
experience as a financial aid administrator that not all of you are fully aware of how
the Federal Consolidation Loan programs works. That is why this message will
describe the student loan consolidation program and point out differences between
FFELP and Direct Loan consolidation. The information provided is very basic and
does not include all of the possibilities and variations in the programs. Its intent is
to make you aware of the general nature of these consolidation programs.
WHAT IS LOAN CONSOLIDATION?
The Higher Education Act (HEA) provides for a loan consolidation program under
both FFEL and Direct Loans. Under these programs, a borrower's underlying loans
are paid off and a new consolidation loan is created. These programs simplify loan
repayment by combining into one new loan several types of Federal education loans
that may have different terms and repayment schedules or may have been made by
different lenders. In the case of a Direct Loan consolidation, the interest rate may be
lower than on one or more of the underlying loans. In both programs the monthly
repayment amount on a consolidation loan is usually lower and the amount of time to
repay may be extended beyond what was available in the separate loan programs. These
features should result in more manageable debt, and make borrowers less prone to
WHAT LOANS MAY BE CONSOLIDATED?
Loans that may be consolidated under both the FFEL and Direct Loan consolidation
1. Student loans made under FFEL (subsidized, unsubsidized, SLS, GSL,
ALAS, and FISL). (Note: A prior FFEL loan may be included in a Direct
Consolidation Loan only if the borrower is unable to obtain an FFEL
Consolidation loan with income-sensitive repayment terms that are acceptable
2. Federal Perkins Loans (including National Defense and National Direct
3. Health related education loans including Health Professions Student
Loans (HPSL), Health Education Assistance Loans (HEAL), Nursing
Student Loans (NSL), and Loans for Disadvantaged Students (LDS).
4. Loans made under the FFEL PLUS program, and
5. Prior FFEL Consolidation loans.
In addition to the loan types noted above, the law allows only the Federal Direct
Consolidation Loan Program to consolidate Direct Loans. These include:
1. Subsidized student loans
2. Unsubsidized student loans
3. Direct PLUS loans
4. Prior Direct Consolidation loans.
These Direct Loans may not be consolidated under the FFEL program.
WHAT ARE THE DIFFERENCES BETWEEN FFEL AND DIRECT LOAN
Even though the HEA authorizes both FFEL and Direct Loan consolidation programs,
there are a number of differences between the programs as noted below:
1. Types of Loans:
As noted above, both programs may consolidate FFEL, Perkins, and the health
education loans, but only the Direct Loan program may consolidate Direct Loans.
2. Lender Options:
The Direct Loan consolidation program must accept all eligible loans that are
requested to be consolidated by an eligible borrower. However, not all FFEL
Consolidation lenders will include non-FFEL loans in consolidation. For example,
some FFEL lenders will not include a HEAL loan in their FFEL Consolidation
loans but instead may offer a separate HEAL consolidation loan with different
3. Interest Rate:
The interest rate on a FFEL Consolidation Loan is the weighted average of the
original interest rates of the consolidated loans rounded up to the nearest whole
percent. The interest rate on Federal Direct Consolidation loans is variable but
capped at 8.25% ( or 9% for Direct Plus Consolidation loans).
4. Loan Benefits:
Federal Direct Consolidation loans retain the underlying loan types so that a
borrower can keep the interest subsidy benefit of the subsidized student loans that
were in the consolidation. For example, if the borrower returns to school, the
portion of the consolidation loan that represented subsidized loans would receive
subsidy benefits. However, FFEL Consolidation loans, that paid off both
subsidized and unsubsidized loans, lose their identity and the entire loan becomes
5. Repayment Plans:
FFEL Consolidation lenders are required to offer to the borrower a standard
repayment plan, a graduated repayment plan, and an income-sensitive repayment
plan. The details of those plans may differ by FFEL lender.
The repayment plans in the Direct Loan program include standard repayment,
graduated repayment, extended repayment, and income-contingent repayment.
The terms of income contingent repayment are provided in regulations. The
monthly payment amount is based upon a formula that takes into account the
borrower's income, family size, and loan amount. Under income contingent
repayment, balances unpaid after 25 years are forgiven. Many borrowers choose
Direct Loan consolidation precisely because it provides them with the option of
repaying under the income contingent repayment plan.
6. Assistance for Defaulted Borrowers:
FFEL lenders may choose not to make consolidation loans to borrowers who have
defaulted on prior loans or not allow them to include a defaulted loan in the
consolidation. The Direct Loan program has options for a defaulted borrower to
consolidate and regain eligibility for Federal student aid.
7. In-school Consolidation:
FFEL Consolidation borrowers may not consolidate until they leave school and
all their loans are in grace or in repayment. However, Direct Loan Consolidation
is available to borrowers who have loans that have entered neither grace nor
A student with only FFEL loans who is enrolled half-time or more is eligible for
in-school consolidation through Direct Loan consolidation if attending a Direct
Loan school; a student with one or more Direct loans is eligible for in-school
consolidation whether or not currently attending a Direct Loan school.
I hope this information is helpful in providing you with a basic understanding
of the loan consolidation process.
Elizabeth M. Hicks
Deputy Assistant Secretary
Student Financial Assistance