Consolidation Description
The following 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. The 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 default.
WHAT LOANS MAY BE CONSOLIDATED?
Loans that may be consolidated under both the FFEL and Direct Loan consolidation programs include:
- 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
- Federal Perkins Loans (including National Defense and National
Direct Student Loans)
- 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).
- Loans made under the FFEL PLUS program, and
- 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:
- Subsidized student loans
- Unsubsidized student loans
- Direct PLUS loans
- Prior Direct Consolidation loans.
These Direct Loans may not be consolidated under the FFEL program.
WHAT ARE THE DIFFERENCES BETWEEN FFEL AND DIRECT LOAN CONSOLIDATION?
Even though the HEA authorizes both FFEL and Direct Loan consolidation programs, there are a number of differences between the programs as noted below:
- 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.
- 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 terms.
- 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).
- 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
unsubsidized.
- 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.
- 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.
- 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 repayment. 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.