EnterChapterTitle: Federal Family Education Loan Program
SectionTitle: Consolidation Loans
Schools must present refinancing and consolidation options to
student borrowers during exit counseling. Once a borrower leaves
school, he or she may consider consolidation as an option to make
repayment easier. The student must contact his or her lender(s) to
request these options, and any agreement to refinance or consolidate
loans is between the borrower and lender. A student should keep in
mind that loan consolidation does not increase Federal Stafford Loan
limits; aggregate loan limits must include any portion of a borrower's
Federal Consolidation Loan used to repay a Stafford Loan.
FEDERAL CONSOLIDATION LOANS
Loan consolidation enables a borrower with several loans to obtain
one loan with one interest rate and repayment schedule. Stafford
Loans (both subsidized and unsubsidized), Federal Insured Student
Loans (FISLs), Federal Perkins Loans, National Direct Student
Loans (NDSLs), PLUS Loans to students, Auxiliary Loans to Assist
Students (ALAS), parent PLUS Loans, SLS loans, Health
Professions Student Loans, Health Education Assistance Loans, and
Nursing Student Loan Program loans may be consolidated only by
lenders that have an agreement with the Department or a guaranty
agency for that purpose. (PLUS Loans to students and ALAS are
former names of the SLS Program.)
A defaulted loan may be included in a consolidation loan if the
borrower has made satisfactory repayment arrangements with the
holder to repay the loan. Three on-time, consecutive monthly
payments under a "satisfactory repayment arrangement" are required
to consolidate a defaulted loan. Satisfactory repayment arrangements
are discussed in Section 7 of this chapter. A borrower can also
consolidate a defaulted loan without having to make three required
payments, if he or she agrees to repay the Consolidation Loan under
the income-sensitive repayment plan.
Loan consolidation allows a lender to pay off the existing loans and
make one Consolidation Loan to replace them. Consolidation may
include, in addition to unpaid principal and interest on the underlying
loans being consolidated, late charges and collection costs applied to
those loans. A guaranty agency (or the Department, if it is holding
the loan) may assess the borrower collection charges or late fees up
to 18.5% of the outstanding principal and interest on the defaulted
FFEL that is to be included in a Federal Consolidation Loan.
A lender must offer standard, graduated, and income-sensitive
repayment options on Consolidation Loans.
APPLYING FOR A CONSOLIDATION LOAN
Generally, a borrower submits a Consolidation Loan application to a
lender holding at least one of the loans to be consolidated. If none of
those lenders agrees to consolidation, the borrower may apply to any
other lender participating in the Consolidation Loan Program.
The borrower must give the lender all relevant information
concerning his or her existing loans. A borrower may add to an
existing Consolidation Loan eligible loans received before the date
of consolidation, if the loans are added within 180 days after the date
the Consolidation Loan is made.
BORROWER ELIGIBILITY FOR A FEDERAL
To be eligible for a Consolidation Loan, a borrower
- must be in the grace period or in repayment status on all loans
- if in default,*1*
- must have made satisfactory arrangements to repay the
defaulted loan and must have made at least three on-time,
consecutive monthly payments or
- must agree to repay the Consolidation Loan under the income-
sensitive repayment plan (with no payments required prior to
- must not have another Consolidation Loan application pending;
- must agree to notify the loan holder of any address changes; and
- must certify that the lender holds at least one of the borrower's
outstanding loans that are being consolidated or that the borrower
has unsuccessfully sought a Consolidation Loan from the holders
of the outstanding loans and was unable to secure one.
There is no longer a minimum debt level a borrower must have to
qualify for consolidation.
[[Married couple consolidating loans]]
A married couple may consolidate individual loans if both spouses
agree to be held jointly and separately liable for repayment of the
Consolidation Loan regardless of the amount of their individual
debts and regardless of any future change in marital status. If one
spouse dies, becomes totally and permanently disabled, has
collection of his or her loan obligation stayed by a bankruptcy filing,
or has that obligation discharged in bankruptcy, the other borrower
remains obligated to repay the loan.
Both spouses must meet the eligibility requirements to qualify for a
Consolidation Loan. Only one spouse is required to certify that the
lender holds at least one of his or her outstanding loans that are being
consolidated or that he or she has unsuccessfully sought a
Consolidation Loan from the holders of the outstanding loans and
was unable to secure one.
Join consolidators are held jointly and severally liable for the
Consolidation Loan. To receive a deferment, forbearance, or
discharge, both borrowers must meet the qualifying conditions,
unless a discharge is due to school closure or false certification. In
that case, only one borrower must qualify; however, only the portion
of the Consolidation Loan affected by the school closure or false
certification can be discharged, unless the borrower's spouse
qualifies for some type of discharge.
[[Federal Direct Consolidation Loans]]
If a borrower is unable to obtain a Consolidation Loan from a lender
eligible to make such loans, the borrower may apply through the
U.S. Department of Education for a Federal DIRECT Consolidation
Loan under the William D. Ford Federal Direct Loan Program. The
borrower must certify that he or she has been unable to obtain from
an eligible lender a Consolidation Loan or a Consolidation Loan with
income-sensitive repayment terms acceptable to the borrower. See
Chapter 11 for more information on Federal Direct Consolidation
Loans. The eligibility criteria for Federal Direct Consolidation Loans
differ from the criteria listed below for Federal Consolidation Loans.
REPAYMENT AND DEFERMENT
Generally, the first payment on a Consolidation Loan is due within
60 days after consolidation. (The repayment period begins on the day
the Consolidation Loan is disbursed.) There are a number of
repayment options, including the graduated repayment and income-
sensitive repayment options mentioned previously. The repayment
period varies from 10 to 30 years, depending on the amount
consolidated and on other student loans the borrower may have. If
the amount to be consolidated is less than $7,500, for example, the
repayment period must not exceed 10 years.
The interest rate for a Consolidation Loan is the weighted average of
the interest rates of the loans consolidated (rounded to the nearest
whole percent). When determining the weighted average of interest
rates, the interest rate used for each loan is that which is in effect for
it at the time the loan is paid in full through consolidation.
There are no insurance premiums or other fees for loan
A borrower is entitled to an interest subsidy during deferment ONLY
when the Consolidation Loan is made up exclusively of subsidized
Stafford Loans. For information on deferment provisions for
Consolidation Loans, see Section 5 of this Chapter.
A borrower interested in consolidation should understand that
consolidating Perkins Loans (or NDSLs) will result in
- a higher interest rate than he or she is paying on those loans,
- less deferment provisions than he or she has available under the
Perkins Loan (or NDSL) Program, and
- the loss of Perkins Loan (or NDSL) cancellation provisions on the
loans being consolidated.
The student should also understand that consolidating Stafford Loans
and SLS loans may result in higher interest rates than he or she was
paying on those loans. However, because Consolidation Loans may
have repayment periods as long as 30 years, the borrower's monthly
repayment amount may be reduced.
If a lender received a Consolidation Loan application before
January 1, 1993, the borrower is responsible for the interest on the
loan during periods of deferment. If a lender received a
Consolidation Loan application between January 1, 1993 and August
10, 1993, interest that accrues during periods of deferment is paid by
the federal government. For loan applications received on or after
August 10, 1993, the borrower is entitled to an interest subsidy
during deferment ONLY when the Consolidation Loan is made up
exclusively of subsidized Stafford Loans.
For information on deferment provisions of Consolidation Loans, see
the deferment chart on page 10-64.
*1* Note that a borrower who wishes to consolidate a loan on which
a court judgment has been secured must sign a new promissory note
for that loan prior to consolidating it. See page 10-77 for more