Student Loan Consolidation

­­Student Loan Consolidation­

­1. What are the benefits of a Direct Consolidation Loan?

Direct Consolidation Loans allow borrowers to combine one or more of their Federal education loans into a new loan.  There are several benefits of a Direct Consolidation Loan: 

  • One Lender and One Monthly Payment - With only one lender and one monthly bill, 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 four different plans to repay their Direct Consolidation Loan, including an Income Contingent Repayment Plan. These plans are designed to be flexible to meet the different and changing needs of borrowers. With a Direct Consolidation Loan, borrowers can switch repayment plans at anytime.
  • 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 Direct Consolidation Loans may qualify for renewed deferment benefits. If borrowers have exhausted the deferment options on their current Federal education loans, a Direct Consolidation Loan may renew many of 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 Direct 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 Direct Consolidation Loan may be lower than the combined payments charged on a borrower's Federal education loans.
  • Retention of Subsidy Benefits - There are two possible portions to a Direct Consolidation Loan: Subsidized and Unsubsidized. Borrowers retain their subsidy benefits on loans that are consolidated into the subsidized portion of a Direct Consolidation Loan.

2. What are the Differences Between FFEL and Direct Consolidation Loan?

Borrowers are encouraged to check with their existing loan holders or servicers to find out about consolidation options available to them. Some differences between programs may include:

  • Minimum balances or numbers of loans required to apply.
  • Types of loans that can be consolidated.
  • A prior account relationship may be required.
  • Repayment incentive benefits to encourage good repayment behavior.
  • The convenience of electronic debit, ensuring that monthly payments are made on time.
  • Repayment plans offered, such as payments sensitive to a borrower's income, family size, and total education indebtedness.

3. Who is eligible for a Direct Consolidation Loan?

  • To qualify for Direct Consolidation Loans, borrowers must have at least one Direct Loan or Federal Family Education Loan (FFEL) Program loan that is in grace, repayment, deferment, or default status. Loans that are in a in-school status cannot be included in a Direct Consolidation Loan.
  • Borrowers can consolidate most defaulted FFEL and Direct Loan Program loans, if they make satisfactory repayment arrangements with their current loan holder(s) or agree to repay their new Direct Consolidation Loan under the Income Contingent 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 them.

4. Can I obtain a Direct Consolidation Loan if I don't have any Direct Loans?

Borrowers who do not have any Direct Loans may be eligible for Direct Consolidation Loans if they included at least one FFEL Loan and has been unable to obtain a Federal Consolidation Loan with a FFEL consolidation lender or has been unable to obtain a Federal Consolidation Loan with income-sensitive repayment terms acceptable to them.

5. Can I consolidate a PLUS Loan?

Yes, PLUS Loans can be consolidated into a Direct Consolidation Loan.

6. Can I consolidate a Perkins Loan?

Yes, it is possible to consolidate Perkins Loans into a Direct Consolidation Loan if borrowers include at least one Direct Loan or Federal Family Education Loan (FFEL) in their request. Perkins Loans cannot be included in a Direct Consolidation Loan by themselves. Furthermore, all Perkins Loans consolidated into the Direct Loan Program will be included in the unsubsidized portion of the Direct Consolidation Loan. Borrowers should carefully weigh the advantages and disadvantages of including a Perkins Loan in a consolidation loan. While the borrowers gain the benefits of the Direct Consolidation Loan Program, they also lose the benefits associated with the Perkins Loan Program.

Following benefits should be considered:

  • Perkins Loans are eligible for additional cancellation benefits, such as performing certain kinds of public service. This benefit is lost when a Perkins Loan is included in a Direct Consolidation Loan.
  • Perkins Loans have a grace period of 6-9 months. When a Perkins loan is consolidated, any remaining grace period is lost.
  • Interest does not accrue when a Perkins Loan is placed in deferment. Since a Perkins Loan is included in the unsubsidized portion of a Direct Consolidation Loan, borrowers are responsible for interest that accrues throughout the deferment period.
  • Perkins Loans generally have a lower interest rate but have a less flexible repayment period of 10 years. The Direct Consolidation Loan Program offers standard, graduated, extended and income contingent repayment plans which may lower monthly payments.
  • Lower payments and extended repayment terms can increase the overall finance charges incurred over the life of loan.

7. Can I consolidate health professions loans?

Yes, With a Direct Consolidation Loan, borrowers can include certain health profession loans sponsored through the U.S. Department of Health and Human Services with other Federal education loans in their Direct Consolidation Loan. Borrowers must include at least one Direct Loan or Federal Family Education Loan (FFEL) Program loan in the Direct Consolidation Loan.

Eligible Health Professions Loans

  • Health Professions Student Loans (HPSL)
  • Health Education Assistance Loans (HEAL)
  • Loans for Disadvantaged Students (LDS)
  • Nursing Student Loans (NSL)

Advantages of Direct Consolidation Loans To Borrowers of Health Professions Loans

  • a longer repayment period;
  • a lower monthly payment; AND
  • a single monthly payment
  • Borrowers who have defaulted on a HEAL may include the collection costs and late fees in a Direct Consolidation Loan.
  • These fees may not be included in HEAL Refinancing.
  • Under the Direct Consolidation Loan Program, HEAL borrowers may repay under the Income Contingent Repayment (ICR) Plan for the life of the loan. HEAL lenders are only required to offer an ICR Plan for the first five years.
  • To qualify for an in-school deferment, Direct Consolidation Loan borrowers must be attending school at least half-time. HPSL, HEAL, and LDS borrowers are required to attend school full time to be eligible for an in-school deferment.

Issues to Consider

  • HEAL loans have fixed or variable rate that are tied to the average 91-day Treasury bill rate plus 3 percentage points. There is no maximum interest rate for variable rate HEAL loans. In contrast, the interest rate for a Direct Consolidation Loan is based on the weighted average of the interest rates on loans being consolidated, rounded to the nearest higher one-eighth of one percent. It is a fixed rate and will not exceed 8.25 percent.
  • The interest on some health professions loans is subsidized by the U.S. Department of Health and Human Services. This interest subsidy is lost when these loans are included in a Direct Consolidation Loan.
  • Interest does not accrue during deferment for HPSL, LDS, and NSL borrowers. Interest does accrue during deferment on the portion of Direct Consolidation Loans that include health professions loans.
  • Borrowers who consolidate Health Professions Loans do not retain the deferment benefits that apply to those loans. However, they gain the deferment benefits that apply to Direct Consolidation Loans. For example, a borrower may be eligible for additional deferments if they have an outstanding balance on a FFEL made before July 1, 1993, when they obtain their first Direct Loan.

8. Can I consolidate my loans if I am enrolled in school?

  • Yes and No. Effective for Direct Consolidation Loan applications received on or after July 1, 2006, borrowers who are enrolled in school cannot consolidate loans that are in an in-school status. These are loans that have not yet entered or used up the 6-month grace period entitlement.
  • Borrowers still can consolidate loans that are in grace, repayment or deferment
  • Borrowers can add loans to an existing consolidation for up to 180 days after the Direct Consolidation Loan was first disbursed. If more than 180 days has passed, borrowers can apply for a new Direct Consolidation Loan. The new consolidation loan can include the original Direct Consolidation loan and must include another eligible outstanding Federal education loan.

9. Can I consolidate an existing consolidation loan?

Yes, under two conditions.

  • A borrower can consolidate existing consolidation loans into a new Direct Consolidation Loan if the borrower includes at least one other FFEL or Direct Loan into the new consolidation loan.
  • A borrower can conslidate a single FFEL consolidation loan if the FFEL consolidation loan is in default status or has been submitted to a guaranty agency for default aversion by the borrower's loan holder.

10. Can I consolidate my loans that are in grace?

Yes, Borrowers who consolidate loans that are in grace may receive a lower interest rate on their Direct Consolidation Loans if they are consolidating variable rate loans. However, once grace status loans are consolidated borrowers lose any remaining grace period. Borrowers receive their first bills within 60 days after the new Direct Consolidation Loan is made.

The timing in which an application is submitted is important:

  • Loans first disbursed on or after July 1, 2006 have fixed interest rates. While borrowers with fixed interest rate loans can consolidate while in grace, there is no benefit to do so since the interest rates for in-grace and in-repayment are the same.
  • Borrowers with variable interest rate loans should apply for Direct Consolidation Loans while their loans are in the grace status in order for them to receive the possible interest rate benefit.
  • Since repayment begins within 60 days of the day the Direct Consolidation Loan is made, borrowers should not apply too early in their loans’ grace periods; otherwise borrowers lose any remaining grace period. For example, if a borrower's loans are consolidated during the second month of grace, they would begin repayment within 60 days, thus forfeiting the remaining portion of the grace period. Therefore, borrowers should wait until about half-way through the 6-month grace period before applying for a Direct Consolidation Loan.

11. What special conditions apply if I am in repayment and just consolidating now?

Borrowers in repayment who want to consolidate their Federal education loans should continue making payments until their loan holder notifies them that their loans are paid in full.

12. Can I consolidate jointly with my spouse?

No, Effective July, 1 2006 a married couple may no longer obtain a Direct Consolidation Loan as joint borrowers.

13. Can I Consolidate a Defaulted Loan?

Generally, Federal education loan(s) in default may be consolidated in a Direct Consolidation Loan if borrowers:

  • Agree to repay the loan(s) under the Income Contingent Repayment Plan. OR
  • Make satisfactory repayment arrangements with the current loan holder(s).

If, before applying for consolidation, borrowers who want to completely clear the default notation from their credit records, they may want to consider another option: loan rehabilitation. Borrowers should contact their loan holders to obtain more information about this option.

Borrowers cannot consolidate defaulted loans under these conditions:

  • If a judgment has been issued against a defaulted loan, it cannot be included in the consolidation unless the judgment order has been vacated (dismissed).
  • If they are trying to consolidate defaulted Direct Consolidation Loans.
  • If they are trying to consolidate defaulted FFEL Consolidation Loans unless they have made satisfactory repayment arrangements with their current loan holder OR the borrowers agree to repay under the Income Contingent Repayment Plan.
  • If they are trying to consolidate defaulted Perkins or health professions loans unless they have made satisfactory repayment arrangements with their current loan holders.

Other Things To Consider

Borrowers with defaulted FFEL or Direct Loan Program loans may be liable for collection costs incurred to collect the loans. If the holder of the defaulted loan, which may be either the U.S. Department of Education or a guaranty agency, retains a collection agency to collect defaulted loans, charges imposed by the collection agency may be added to the amount borrowers owe. This means that the amount of the Direct Consolidation Loan may include collection costs of up to 18.5% of the principal and interest outstanding on the defaulted loan.  For defaulted Perkins Loans and health professions loans, collection costs may equal as much as the amount owed at the time the defaulted loan is paid off through consolidation.

14. Should I rehabilitate before consolidating my defaulted loan?

Rehabilitation or Consolidation?

  • There are many benefits to rehabilitating a defaulted loan before consolidation. If you consolidate a defaulted loan without rehabilitating it , your credit record continues to show a default status on the loan. This is true even after the consolidation loan pays off the defaulted loan in full.
  • Consolidating a defaulted loan will result in your credit report bearing the notation that the loan was in default but then "paid in full." This notation will remain on the credit report for up to seven years. While a "paid in full" notation is preferable to an unpaid default, , there is still the possibility that lenders will deny you future credit, such as mortgages, auto loans, or credit cards because of this notation.
  • However, if you rehabilitate a defaulted loan before consolidating it , the loan holder will update your credit record to no longer reflect the default status of the rehabilitated loan(s).
  • Rehabilitating a defaulted Direct Loan or FFEL loan requires that you make at least nine (9) full payments of an agreed amount within twenty (20) days of their monthly due dates over a ten (10) month period. Rehabilitating a defaulted Perkins loan requires twelve (12) on-time monthly payments. Contact your loan holder to obtain additional rehabilitation terms and conditions for your loan type.
  • Keep in mind that if you default on your loan, you are liable for any collection costs incurred to collect the loan. If you pay off the defaulted loan by taking out a Consolidation Loan, the amount you borrow must be enough to pay off your defaulted loan, including principal, interest, and collection costs. This means that the amount of the new loan may need to be up to 18.5% larger than the principal and interest outstanding on your defaulted loan.
  • Both rehabilitation and consolidation will reinstate your eligibility for additional Federal student aid under Title IV of the Higher Education Act (Pell Grants, FFEL and Direct Loans etc.)

15. What are the consequences of defaulting?

Borrowers who fail to make a payment on time are considered delinquent on their Direct Consolidation Loans. Borrowers who do not make payments for 270 days are in default. Defaulting has severe and long-lasting consequences, as follows:

  • The Department of Education can immediately demand repayment of the total loan amount due.
  • The Department of Eduction will attempt to collect the debt and may charge collection costs.
  • The Department of Education reports defaulted loans to national credit bureaus, damaging borrowers’ credit ratings and, making it difficult for borrowers to make purchases such as cars or homes.
  • Borrowers with loans in default are ineligible for Title IV student aid.
  • Borrowers with loans in default are ineligible for deferments
  • The Internal Revenue Service can withhold borrowers’ Federal income tax refunds.
  • Borrowers' wages may be garnished.

It is important that borrowers with Direct Consolidation Loans stay in touch with the Direct Loan Servicing Center. Default can occur when borrowers fail to keep the Direct Loan Servicing Center up to date on address and name changes, causing billing statements to go astray. In addition, the Direct Loan Servicing Center can offer alternatives when borrowers have trouble making monthly payments. Borrowers may apply for a deferment or forbearance, or change repayment plans.

16. What are the repayment plans?

When repaying a Direct Consolidation Loan, you may choose from as many as four repayment plans with various term selections.

  • Standard Repayment Plan:  You will pay a fixed amount each month until your loan(s) are paid in full. Your monthly payments will be at least $50 for up to 10 to 30 years, based on your total education indebtedness.
  • Graduated Repayment Plan: Your minimum payment amount will be at least equal to the amount of interest accrued monthly. Your payments start out low, and then increase every two years for up to 10 to 30 years, based on your total education indebtedness
  • Extended Repayment Plan:  To be eligible, your Direct Loan balance must be greater than $30,000 and you will have up to 25 years to repay your loan(s). You have two payment options:
    1. Fixed Monthly Payment Option -You will pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50.
    2. Graduated Monthly Payment Option - Your minimum payment amount will be at least $50 or the amount of interest accrued monthly, whichever is greater. Your payments start out low, and then increase every two years.
  • Income Contingent Repayment Plan (ICR): Monthly payments that are based on a borrower's annual income, Direct Loan balance and family size, and are spread over a term of up to 25 years.

If you consolidate more than one loan type (subsidized, unsubsidized and PLUS) you will have one Direct Consolidation Loan with up to two parts: Direct Subsidized and Direct Unsubsidized (which includes PLUS) Consolidation Loans. Even with up to two parts of each Direct Consolidation Loan, you make only one payment each month.

17. How is the amount of my payment calculated under the ICR plan?

The ICR Plan is designed to keep payments affordable. Generally, borrowers pay the lesser of:

  • the amount they would pay if they repaid their loan in 12 years, multiplied by an income percentage factor that varies with their annual income, or
  • 20 percent of their discretionary income (AGI minus the poverty level for their family size)

Under the ICR plan, the monthly payment is $0 for borrowers with family incomes that are less than or equal to the U.S. Department of Health and Human Services poverty level for their family size. Borrowers whose calculated monthly payment is greater than $0 but less than $5 are required to make a $5 monthly payment. Other borrowers must pay the calculated monthly payment. Until the Department receives income information from the IRS or alternative documentation of income, borrowers' monthly payments are equal to the interest that accrues each month. If they are unable to make the interest-only payments, borrowers may request a forbearance until the first scheduled Income Contingent Repayment (ICR) plan payment is due.

18. Can I change repayment plans?

Yes. Most borrowers may change repayment plans at any time. Borrowers who are required to repay under the ICR plan must make three consecutive monthly payments before switching to another plan. There is no limit to the number of times borrowers may change plans.

  • A borrower may change to the ICR plan at any time. After the switch, the borrower's repayment period will be 25 years, less any time spent in the ICR and the Standard repayment plan. Time spent in several other plans may not count towards the 25 year maximum.
  • A borrower may change to another plan as long as the new plan has a repayment term longer than the amount of time the borrower has already spent in repayment. The new repayment term is determined by subtracting the amount of time a borrower has spent in repayment from the term allowed under the new plan.

19. How long does it take to consolidate my loans once I submit my application?

The consolidation process generally takes 60-90 days.

20. When can I expect my first bill?

Borrowers will receive bills from the Direct Loan Servicing Center within 60 days of the first disbursement of their Direct Consolidation Loan.

21. How do I make payments?

  • Borrowers receive monthly billing statements from the Direct Loan Servicing Center, unless they enroll in the Electronic Debit Account (EDA).
  • Borrowers receive a 0.25 percent discount on their interest rate for as long as they continue to make payments using EDA.
  • Borrowers must keep the Direct Loan Servicing Center informed of changes of address and to their names. Borrowers are responsible for making payments on time regardless of whether they receive billing statements. Borrowers should send payments to:

U.S. Department of Education
Direct Loan Payment Center
P.O. Box 530260
Atlanta, GA 30353-0260

22. Can I prepay on my loan?

Borrowers may prepay all or part of the unpaid balance on any Direct Loan at any time, without an early repayment penalty. If a borrower makes a payment that exceeds the required monthly payment, the prepayment will be applied first to any charges or collection costs, then to outstanding interest, and last to principal. However, if a borrower's account has no outstanding interest, the prepayment is applied entirely to principal. If the prepayment is twice the borrower's monthly payment, the next payment due date is advanced unless the borrower specifies otherwise. The borrower will be notified of a revised due date.

23. How does Total Education Indebtedness effect the repayment term of my Direct Consolidation Loan?

If you elect to repay your Direct Consolidation Loan under either the Standard or Graduated Repayment Plans, your repayment term is determined based on your consolidation loan amount and other eligible education loans that are not part of your Direct Consolidation Loan as long as you provided information about those loans on your application.