(Loans) Subject: Direct Consolidation Loan Information - Treatment of Underpayments and Overpayments

Posted Date:June 28, 2011

Subject: Direct Consolidation Loan Information - Treatment of Underpayments and Overpayments

This Electronic Announcement reminds all holders of loans eligible for consolidation into a Direct Consolidation Loan of the long-held policy for handling underpayments and overpayments that may occur when the Department of Education (the Department) pays off the underlying loans.

Note: This guidance does not apply to payoffs of federally-owned loans serviced by the Department’s federal loan servicers.

For both underpayments and overpayments, the tolerances provided below apply to the aggregate eligible balance of principal, interest, fees, and collections costs.

Underpayment Tolerance Procedures

• If a loan holder receives a payoff from the Direct Consolidation Loan Program that is less than the amount needed to fully retire a borrower’s underlying loan(s) and that underpayment is less than $25.00, the loan holder may write off the shortage.
  
• This underpayment tolerance amount of $25.00 applies to the total of all of the borrower’s loans by loan program type that were consolidated by the borrower. Loan program types are Subsidized Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans, and Federal Consolidation Loans. Thus, for example, a borrower with both Subsidized Stafford and Unsubsidized Stafford loans would have an underpayment tolerance of less than $25.00 for the Subsidized Stafford loans, and a separate tolerance of less than $25.00 for the Unsubsidized Stafford loans.
  
• If the loan holder chooses not to write off the small balance, it may request the additional amount from the Direct Loan Consolidation Center.
  
• If a loan holder receives a payoff from the Direct Consolidation Loan Program that is less than the amount needed to fully retire a borrower's underlying loan(s) and that underpayment is $25.00 or more, the Direct Loan Consolidation Center will make the additional payment upon request of the loan holder. If the loan holder chooses, instead, to write off those higher balances, it may do so.
  
• All requests to the Direct Loan Consolidation Center for additional payoff funds must be made promptly and must include identifiers for each borrower and the specific loan type or types for which funds are being requested.
  
• Whether the balance is written off or the loan holder requests additional funds from the Direct Loan Consolidation Center, loan holders may not bill the borrower for the underpayment amount. And, in both instances, the loan holder must notify the borrower that the loan(s) is paid in full.

Overpayment Tolerance Procedures

• If a loan holder receives a payoff from the Direct Loan Consolidation Program that is more than the amount needed to fully retire a borrower’s underlying loan(s) and that overpayment is less than $10.00, the loan holder may retain the overpayment. The Direct Loan Consolidation Center will not expect payment from the loan holder. As noted for underpayments, the $10.00 overpayment tolerance applies to the total of all of the borrower’s loans by loan program type that were consolidated by the borrower.
  
• If a loan holder receives a payoff from the Direct Loan Consolidation Program that is more than the amount needed to fully retire a borrower’s underlying loan(s) and that overpayment is $10.00 or more, the loan holder must promptly return the full overpayment amount to the Direct Loan Consolidation Center. All returns of funds to the Direct Loan Consolidation Center must include identifiers for each borrower and the specific loan type or types for which funds are being returned.