Publication Date: May 2005
DCL ID: GEN-05-08
Subject: Lenders' Options for Determining Federal Consolidation Loan Interest Rates and Permitting Borrowers to Enter Repayment EarlySummary: This letter addresses questions relating to the determination of consolidation loan interest rates under the Federal Family Education Loan (FFEL) Program and clarifies the early repayment option available to borrowers under Section 428(b)(7) of the Higher Education Act of 1965, as amended.
Posted on 05-16-2005
FFEL Consolidation Loan Weighted Average Interest Rate
Consolidation loans have fixed interest rates that are based on the weighted average of the interest rates on the loans being consolidated. A lender can provide a new consolidation loan borrower with the lowest statutory weighted average interest rate for loans by using the lower of the weighted average of the interest rates on the loans being consolidated as of July 1 or the date the lender received the borrower's consolidation loan application. The lender should apply a consistent method of determining when an application is received.
If a borrower specifically requests that his or her loan be disbursed prior to July 1st, the lender should honor the borrower's request, if possible.
This guidance is consistent with the Department's treatment of consolidation loan interest rates for Direct Consolidation Loans.
Permitting Borrowers to Enter Repayment Early
Under the Higher Education Act of 1965, as amended and the Department's regulations, a borrower can request a repayment schedule that provides for repayment to commence at a date that is earlier than six months after the date the borrower ceases to carry at least one-half the normal full time academic workload. If the lender grants the request, the loan enters the repayment period and the borrower waives any applicable grace period. This is the case even if the borrower is currently enrolled in school.
Such a borrower will be eligible to obtain a consolidation loan to repay the loan on which early conversion to repayment was granted, assuming all other eligibility criteria are met. As stated above, the borrower waives any applicable grace period, now and in the future.
If the lender determines that the borrower is still enrolled, the lender can put the loan that will now be in repayment, into an in-school deferment status at the borrower's request. The interest rate on the loan would be the deferment rate. If the borrower consolidates the Stafford Loan, the deferment interest rate should be used in calculating the weighted average interest rate on the consolidation loan.
We have attached answers to some questions submitted by the National Council of Higher Education Loan Programs (NCHELP) that provide more detail on the issues addressed in this letter. Should you have questions concerning the guidance provided in this letter, please contact Pam Moran at (202) 502-7732 or George Harris at (202) 502-7521.
Sally L. Stroup
Office of Postsecondary Education