FEDERAL CONSOLIDATION LOAN PROGRAM
SUMMARY: This material provides information on the common application and promissory note and other related forms for the Federal Consolidation Loan Program. This implementation guidance is divided into three sections.
Section I provides information on Printing Paper Copies of the Consolidation Loan forms
Section II provides guidance for transitioning to the new forms
Section III provides policy information in response to questions frequently asked of the Department
Section I - Instructions for Printing Paper Consolidation Loan Forms
a. Application and Promissory Note (and related instructions)
The printing instructions for the common Consolidation Loan Application and Promissory Note differ from the guidance provided for other common FFELP forms. In approving the consolidation loan forms, the Department is providing two options for printing the application and note. These options include:
- Lenders and guarantors may print the standard form, which includes a brief explanation of the mandated borrower repayment options. The repayment plans listed in section E of the application/note and in the corresponding instructions include: standard repayment, graduated repayment, income-sensitive repayment and extended repayment. See version A-1 of the form.
- Lenders and guarantors may print customized forms for Section E of the application and promissory note, as well as corresponding instructions. The section must include information on the mandated repayment plans and may also include information on any customized plans offered by the lender. See version A-2 of the form.
The Department is providing these two options to allow lenders that offer custom repayment plans to include information on these custom plans within the common application packet. No other changes may be made to the text of the common Consolidation Loan Application and Promissory note.
Information and/or logos identifying the guaranty agency, lender, and/or program may be printed in the space provided in the upper right-hand corner of the application and promissory note and the front page of the instructions. This information may include the logo, name, address, telephone number, OE code, and fax number. In addition, a code may be added to this section or to the bottom of the forms to track application printing and distribution. A guarantor, lender, or program may use coding in other places of the common application and promissory note (that is, the side or bottom margins of the application) to meet requirements for its individual processing system, provided no wording changes are made to accommodate the coding.
As is the case today, lenders and guarantors are permitted to provide supplemental or wraparound materials along with the common forms. Examples of information that are often included in the supplemental materials include: additional eligibility criteria; application routing instructions; and additional information on the repayment plans. In addition, the Department encourages lenders and guarantors to include sample repayment schedules for each of the repayment plans available within the lender or guarantors program.
A lender or guarantor may distribute paper or electronic versions of the forms. In addition, to help borrowers complete the loan documents, lenders and guarantors may pre-fill applicant information from the data contained in its records. The Department is not prescribing the number of copies of the form to be printed.
b. Borrowers Rights and Responsibilities
The Borrowers Rights and Responsibilities are similar to those approved by the Department for use with the common Federal Stafford and Federal PLUS loan forms and the Master Promissory Note. No changes may be made to the text of the Rights and Responsibilities statement.
c. Additional Loan Listing Sheet
As with the application and promissory note, the guarantor, lender, and/or program identification information may be added to the Additional Loan Listing Sheet. Tracking code and bar code information may also be included. No other changes are to be made to the text of the Additional Loan Listing Sheet. As with other forms, the lender or guarantor may pre-fill applicant information from the information contained in its records.
d. Verification Certificate (and related instructions)
The common Verification Certificate or an electronic equivalent, is to be completed by loan holders to provide and confirm important information about the loan(s) to be consolidated. The consolidating lender should incorporate its program information and fax number into the form. Additionally, the consolidating lender may provide tracking and bar code information as described for the other common consolidation loan materials.
The new common Verification Certificate simplifies the consolidation process for borrowers. Under the process in place today, the borrower provides a separate original signature (through a form or label process) for each loan to be included in the consolidation loan. By signing the common Federal Consolidation Loan Application and Promissory Note, the borrower provides his or her authorization for release of loan information by the holder; no additional borrower authorization is required to permit a holders completion of the Verification Certificate. Upon receipt of a Verification Certificate, a loan holder can rely on the statements included on the Verification Certificate as evidence that the borrower has requested a release of this information.
Using the information provided by the borrower on the loan application, the consolidating lender may preprint any information and request that the holder correct any information provided.
Electronic records used in lieu of the paper Verification Certificate must, at a minimum, include the data elements contained on the Verification Certificate form.
e. Request to Add Loans to a Federal Consolidation Loan
A new common form to add loans to a Federal Consolidation Loan has been approved by the Department. As with the other forms, guarantor, lender, and/or program information, tracking code, and bar code information may be added to the form. As with other forms, the lender or guarantor may pre-fill applicant information from the information contained in its records.
Section II - Implementation and Transition Period
a. Implementation Time Frame
The consolidation loan materials have been approved for immediate use. However, the Department recognizes that a transition period is needed for lenders and guarantors to obtain the new common forms, implement related processing procedures, and provide prospective applicants with the revised forms. The new common forms will be required for all consolidation loan applications signed by borrowers on or after January 1, 2002. If a lender receives an existing application dated before January 1, 2002, the lender should continue to process the loan and provide the borrower with the consolidation loan addendum previously approved by the Department. A borrower who signs an existing application on or after January 1, 2002 should be instructed to complete the common Federal Consolidation Loan Application and Promissory Note.
b. Electronic Format
The Higher Education Act specifically requires the Department, in prescribing common forms, not to limit the development of electronic forms and procedures. If consolidating lenders and guarantors opt to use electronic processing, the Department will not dictate the electronic format. However, electronic processes must use the Department approved language for data elements and instructions. In addition, consolidating lenders and guarantors must use the format of the promissory note, borrowers rights and responsibilities, and other accompanying information materials approved by the Department. As part of its electronic processing, a lender or guarantor may preprint information for the borrower or certifying lender.
c. Reproduction of Application Materials
Working with the National Council of Higher Education Loan Programs (NCHELP), the Department has made arrangements for lenders and guarantors to secure camera-ready art for all of the forms. Information about this service is available from NCHELPs web site at www.nchelp.org.
You are not required to use this service; however, the general presentation of the form may not be changed from the form that the Department has approved.
The actual number of copies is not being specified so that a guarantor or lender may print as many copies of the original as needed. A guarantor, lender, or program may print in the bottom section of the application a reference to the type of copy (e.g., Original, Lender Copy, Borrower Copy) and an application tracking code on the form.
Section III - Policy Questions and Additional Information
During the development of the common consolidation loan materials, several policy questions were raised to the Department by the FFELP community. This section addresses some of these issues and is intended to support a consistent application of the common consolidation loan requirements.
a. Defaulted FFELP Borrower Eligibility for Loan Consolidation
Effective July 1, 1996, a borrower with a defaulted FFELP loan is eligible to consolidate his or her defaulted loan if he or she makes satisfactory repayment arrangements (as defined in 34 CFR 682.200), or agrees to repay the loan under an income-sensitive repayment plan. The common application and promissory note incorporate this regulatory requirement. In addition, the status codes listed for the Verification Certificate have been revised to provide two additional options: DS to define a loan that is in a default claimpaid status for which the borrower has made satisfactory repayment arrangements, and DN to define a loan that is in a default claimpaid status for which the borrower has not made satisfactory repayment arrangements. If a holder certifies a loan as a DN, the borrower is not eligible to consolidate that loan at that time unless he or she agrees to repay the consolidation loan under an income-sensitive repayment plan.
If, as part of the original loan application package, the borrower did not select an income-sensitive repayment plan, and the holder certifies the borrowers loan as a DN(s), the lender may include the loan in the consolidation loan if the borrower subsequently agrees to repay the loan under an income-sensitive repayment plan. Alternatively, the borrower may make satisfactory repayment arrangements and add the loan(s) within the 180 day add-on period.
Effective for applications received on or after October 1, 1998, loans in a default status currently subject to a judgment or a wage garnishment order are not eligible for consolidation unless the judgment is vacated or the wage garnishment order is lifted no later than loan disbursement. A new status code of DI has been created for the Verification Certificate to accommodate accurate verification of status. If a holders policy is to lift the garnishment or vacate the judgement upon receipt of a consolidation application, a code other than DI should be used. If the holders policy is to vacate the judgement or lift the garnishment order at the time the consolidation loan is disbursed, DI should be used along with a message under Item 16 of the verification certificate. In either of these cases, the consolidation lender may make the loan as the judgement or garnishment will be lifted no later than when the loan is made. If the holders policy is not to lift the garnishment order or vacate the judgement, DI should be used. In this latter case, the borrower may be eligible to add the defaulted loan to the consolidation loan during the 180-day add-on period if the holder certifies eligibility during the add-on period and removes the DI Code.
b. Selection of an Income-Sensitive Repayment Plan
If a borrower selects an income-sensitive repayment plan, federal regulations require the borrower to provide certain information to the lender (e.g., income information). The common consolidation loan materials advise the borrower that if he or she selects the income-sensitive plan, the lender:
- May establish an initial repayment plan based on the terms of a standard or graduated repayment schedule. If a borrower initially placed on a graduated or standard plan wishes to repay under an income-sensitive plan, the lender must provide the borrower with information on income-sensitive repayment and any required documentation following loan disbursement. The borrower will be converted to an income sensitive plan once the required documentation is submitted to the lender; or
- Alternatively, the lender may instruct the borrower in the wraparound information to provide the documentation required to establish income-sensitive repayment.
Note: As a reminder, loans in default are not eligible for consolidation unless the borrower agrees to repay the loan under an income sensitive repayment plan or makes satisfactory repayment arrangements.
c. Eligibility for Subsidized Deferments
Section 34 CFR 682.301 allows a borrower to receive subsidy benefits on that portion of the consolidation loan that repays subsidized Federal Stafford loans, subsidized Federal Direct Stafford loans, subsidized FISL loans, subsidized Federal Consolidation loans, or subsidized Federal Direct Consolidation loans. The borrower is responsible for interest that accrues during deferment on the portion of the Consolidation Loan that repays other loan types. The instructions for the application and promissory note (section D) provide this clarification for borrowers. Additionally, this information is described in Section 2 of the Borrowers Rights and Responsibilities.
When completing the Verification Certificate, holders should correctly identify loan types, which determine the benefits the borrower may be eligible to receive on his or her consolidation loan.
d. Facsimile Number / E-Mail Address
The application and promissory note include the option for the borrower and spouse (if applicable) to provide both a facsimile (fax) number and/or e-mail address. These fields are identified as optional fields; therefore, borrowers have the choice whether or not they wish to provide this information. Lenders may not use the facsimile number for collections.
e. Collection Costs on Defaulted Loans
The common forms advise the borrower that the maximum amount of collection costs that may be charged on a defaulted FFELP loan (Federal Stafford, FISL, SLS, PLUS, or Consolidation) held by a guarantor that is being consolidated is 18.5 percent of the principal and accrued interest on the defaulted loan at the time the holder certifies the payoff balance. Other eligible loans included in the consolidation loan are not covered by this restriction. In addition, by signing the promissory note, the borrower authorizes any collection costs included in the consolidation loan to be capitalized (added to the principal balance of the loan).
f. Interest Rate
Clarification on several policy issues regarding interest rates is also reflected in the common Federal Consolidation Loan Application and Promissory Note. The application and promissory note and the Verification Certificate request the borrower and holder to report the interest rate on the loans being consolidated. The rate reported is the rate to be used in determining the weighted average interest rate. Unless the consolidating lender offers the borrower a lower rate on the consolidation loan, the weighted average interest rate is fixed for the term of the loan.
For the portion of the loan attributable to HEAL, the interest rate is variable and is adjusted each July 1. The interest rate is based on the average of the bond equivalent rates of the 91-day Treasury bill auctioned for the quarter prior to July 1, plus 3 percent. The portion attributable to HEAL is not included in the calculation of the weighted average interest rate.
g. HEAL Combined Payment Plan
The Borrower Authorization and Certification section of the application and promissory note includes the borrowers authorization to establish a combined payment plan for purposes of any HEAL loan owed by the borrower. Under this program, the borrowers consolidation loan and any HEAL loan serviced by the consolidating lender may be repaid in a single payment program. Under this repayment option, the HEAL loan is not considered part of the consolidation loan.
h. Spousal Consolidation
The common forms provide the option for spouses to jointly consolidate their loans. In such cases, both borrowers are jointly and severally liable for the repayment of the loan regardless of any change in their marital status.
In addition, the forms clarify that to be granted a deferment or forbearance on the loan, both borrowers must qualify for a deferment or forbearance. They may, however, be eligible for a deferment or forbearance during the same period of time if they qualify for the same or a different deferment or forbearance type during the same period.
To be eligible for discharge of the consolidation loan (e.g., bankruptcy, permanent and total disability, death) both borrowers must qualify for a discharge conditionbe it the same or different conditions.
i) 180 Day Add-on Period
The Higher Education Act now allows Federal Consolidation Loan borrowers to add eligible loans, not included in the original consolidation, to their Federal Consolidation Loan. These additional loans may have been made before or after the date the consolidation loan was made. To ensure consistency within the program, the Department has clarified that for a borrower to be permitted to add loans to his or her consolidation loan, the lender must receive the borrower's request on or before the 180th day after the consolidation loan was made.
It is important that the information contained in Section A of the Request to Add Loans to a Federal Consolidation Loan be identical to that provided on the borrowers original Federal Consolidation Loan Application and Promissory Note. It is this information that links the previously signed application and promissory note to the add-on form.
After confirmation of eligibility through the verification certificate process, the additional loans may be added to the Federal Consolidation Loan. The subsequent addition of loans may affect the length of the repayment period, the monthly payment amount, and the weighted interest rate. The consolidating lender must recalculate the consolidation loan and notify the borrower of any increases in the loan amount or other changes in the terms of the loan. In addition, the consolidating lender must report the increased consolidation loan balance to the guarantor.
Loans made to the spouse can be added only if the spouse was a party to the original Federal Consolidation Loan. The spouse cannot be added to the Federal Consolidation Loan as part of the add-on process.