To qualify for a Direct Consolidation Loan, borrowers must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in grace, repayment,deferment or default status. Loans that are in an in-school status cannot be included in a Direct Consolidation Loan.
NOTE: Borrowers whose consolidation applications are received on or after July 1, 2010 and before July 1, 2011 may qualify to consolidate loans that are in an in-school status into a Direct Consolidation Loan. Click here for more information and the eligibility requirements for this temporary provision.
Borrowers can consolidate most defaulted education loans, if they make satisfactory repayment arrangements with the current loan holders or agree to repay their new Direct Consolidation Loan under the Income Contingent or Income Based Repayment Plan.
Borrowers who do not have Direct Loans may be eligible for a Direct Consolidation Loan if they include at least one FFEL Loan and have been unable to obtain a Federal Consolidation Loan with a FFEL consolidation lender or have been unable to obtain a Federal Consolidation Loan with income-sensitive repayment terms acceptable to themor intend to apply for loan forgiveness under the Public Service Loan Forgiveness Program.
Borrowers who have only a Direct Consolidation Loan cannot consolidate again unless they include an additional loan.
NOTE: The Direct Loan Servicing Center has information on the Public Service Loan Forgiveness Program.
When a borrower consolidates loans in the Direct Consolidation Loan Program, the U.S. Department of Education (Department) pays off the original Federal education loans and originates a new loan for the total amount of the loan(s) consolidated. Here's how that works:
Step 1: Application Review
We review the borrower's application and enter it into our system. If there is missing or incorrect information, we attempt to contact the borrower directly and/or send a letter identifying the needed information. If a borrower applied for the loan by phone or through the web, the Loan Consolidation Department sends a promissory note to be signed and returned by the borrower. The borrower has 14 days to provide the information to us or the application is cancelled.
We request verification of the information on the borrower's application to determine each loan's eligibility for consolidation and its payoff balance. Currently, we electronically verify Direct Loans, defaulted loans held by the Department, loans serviced by loan holders enrolled in our Electronic Verification Certification (EVC) service, and loans held by Sallie Mae. For all other loans, we send a verification certificate to each loan holder to obtain the required information. Loan holders have ten business days to complete the verification certificate and return it to us.
A loan statement summary package is mailed to the borrower and payments are mailed to the lenders simultaneously after his or her loans are verified.
If a loan is not in default, we send the loan pay-off to the loan holder or credit the borrower's Direct Loan account. If a loan is in default, the Department’s Default Resolution Group or the Guarantee Agency will receive an electronic payment manifest, SF-1081, for the principal and interest, and a check for the collection costs. Participants in EFT (Electronic Funds Transfer) receive these payments electronically.
When a loan holder receives a payment from the Consolidation Department, the loan holder(s) is required by regulation to fully discharge the debt upon receipt of proceeds and notify the borrower that the loan(s) has been paid in full, even if we underpay the loan.
Any payment a borrower makes to the previous loan holder(s) after the loan(s) is paid off is forwarded to us as an overpayment. These payments are applied to the consolidation loan balance. If our payment does not satisfy the borrower's account balance, the loan holder is prohibited from billing the borrower and must notify us of the underpaid amount. We work with the loan holder(s) to resolve any underpayment or overpayment issues. (See "How do I request an underpayment or return an overpayment?" or "What are the Tolerances for Under and Over Payments?")
Borrowers' Direct Consolidation Loan accounts are set up when their loans are paid off. Once account set up is complete, borrowers receive important information about their loan status and payment due dates. Normally, their first payment is due within 60 days of the disbursement of the Direct Consolidation Loan.
NOTE: Borrowers are required to continue making payments with their current loan holder(s) until they receive written notification that their loan(s) has been successfully consolidated.
Borrowers have 180 days after the first disbursement of their consolidation loan to add a loan(s) to the consolidation by completing the Request to Add a Loan to an Existing Federal Direct Consolidation Loan [PDF Format (28K)] form. After 180 days, the borrower must complete a new application.
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Wondering what your school's role in consolidation is?
Remember: Your borrowers may be eligible even if your school only participates in the FFEL Program.No problem! The following four items cover it all.
 Direct Consolidation Loans allow borrowers to combine one or more of their Federal education loans into a new loan that offers several advantages.One Lender and One Monthly Payment With only one lender and one monthly payment due for student loans, it is easier than ever for borrowers to manage their debt. Borrowers have only one lender, the U.S. Department of Education, for all loans included in a Direct Consolidation Loan. Flexible Repayment Options Borrowers can choose from multiple repayment plans with various term selections to repay their consolidation loan(s), including an Income Contingent Repayment and an Income-Based Repayment Plan. These plans are designed to be flexible to meet the different and changing needs of borrowers. With a consolidation loan, borrowers can switch repayment plans at anytime. If you select the IBR Plan and want to change at a later date, your only option will be the Standard Plan. No Minimum or Maximum Loan Amounts or Fees There is no minimum amount required to qualify for a Direct Consolidation Loan! In addition, consolidation is free. Varied Deferment Options Borrowers with consolidation loans may qualify for renewed deferment benefits. If borrowers have exhausted the deferment options on their current Federal education loans, a consolidation loan may renew those deferment options. In addition, borrowers may be eligible for additional deferment options if they have an outstanding balance on a FFEL Program loan made before July 1, 1993, when they obtain their first Direct Loan. Reduced Monthly Payments A consolidation loan may ease the strain on a borrower's budget by lowering the borrower's overall monthly payment. The minimum monthly payment on a consolidation loan may be lower than the combined payments charged on a borrower's Federal education loans. Retention of Subsidy Benefits There are two (2) possible portions to a consolidation loan: Subsidized andUnsubsidized. Borrowers retain their subsidy benefits on loans that are consolidated into the subsidized portion of a consolidation loan.
Temporary In-School Consolidation Authority
During a one (1) year period, borrowers who meet certain requirements may consolidate loans that are in an in-school status into a Direct Consolidation Loan. Direct Consolidation Loans may be made under this temporary provision to borrowers whose consolidation applications are received on or after July 1, 2010 and before July 1, 2011.
Borrowers will lose the grace period on a FFEL Subsidized/Unsubsidized Stafford Loan or Direct Subsidized/Unsubsidized Loan by consolidating the loan while it is in an in-school status. Similarly, PLUS borrowers who consolidate a Federal PLUS Loan or Direct PLUS Loan that was first disbursed on or after July 1, 2008 will lose the six (6) month post-enrollment deferment period. Parent PLUS borrowers who consolidate a Federal PLUS Loan or Direct PLUS Loan that was first disbursed on or after July 1, 2008 will lose eligibility to defer repayment while the student for whom the loan was obtained is in school.
When a student has a consolidation loan, the school can determine his or her remaining loan eligibility by using the original principal loan amount minus any payments made.Click here for information on the eligibility requirements for this temporary provision. Note: The outstanding balance on the subsidized and unsubsidized portions of the consolidation loan is considered when determining the borrower's subsidized and unsubsidized loan limits. For example, if a consolidation loan contains an unsubsidized portion, the outstanding balance on the unsubsidized portion of the consolidation is considered in determining the borrower's unsubsidized loan limit. Schools can determine the subsidized and unsubsidized portion of the consolidation loan by:
If data is available on NSLDS, schools may be able to view the underlying loans in the consolidation loan to determine the loan type. Schools can access NSLDS online and find the loans that were paid off through consolidation by selecting all loans with a status code of PC (paid through consolidation). Once the school has determined the types and original amounts of the underlying loans, it must prorate the outstanding principal balance amount on the consolidation loan in the same ratio that each of the "PC" original loan amounts is to the original consolidation loan amount. For example, assume that a borrower's original principal balance was composed of 25% subsidized loans and 75% unsubsidized loans. The school can assume that 25% of any remaining unpaid balance is subsidized and would be counted towards the borrower's subsidized aggregate loan limit and 75% towards the borrower's unsubsidized aggregate loan limit.  "Federal Consolidation Loans and Federal Direct Consolidation Loans are not counted directly in the cohort default rate calculation. However, the status of a consolidation loan may affect how the loan(s) that was paid off by the consolidation loan is included in the cohort default rate calculation." If all of a borrower's underlying loans were included in your school's cohort default rate calculation before they were consolidated, the status of the consolidation loan has no effect on your subsequent cohort default rate calculations. However, if an underlying loan was not included in your cohort default rate calculation before it was consolidated, the consolidation loan's default may cause that underlying loan to be counted as defaulted when it is included in your cohort default rate. Please see the Cohort Default Rate Guide for complete details and information on consolidation and cohort default rates. | ||||
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