| AwardYear: 1997-1998 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 8 SectionTitle: Consolidation Loans PageNumbers: 79-83 Schools must present refinancing and consolidation options to student borrowers during exit counseling. Once a borrower leaves school, he or she may consider consolidation as an option to make repayment easier. The student must contact his or her lender(s) to request these options, and any agreement to refinance or consolidate loans is between the borrower and lender. A student should keep in mind that loan consolidation does not increase Federal Stafford Loan limits; aggregate loan limits must include any portion of a borrower's Federal Consolidation Loan used to repay a Stafford Loan. FEDERAL CONSOLIDATION LOANS Loan consolidation enables a borrower with several loans to obtain one loan with one interest rate and repayment schedule. Stafford Loans (both subsidized and unsubsidized), Federal Insured Student Loans (FISLs), Federal Perkins Loans, National Direct Student Loans (NDSLs), PLUS Loans to students, Auxiliary Loans to Assist Students (ALAS), parent PLUS Loans, SLS loans, Health Professions Student Loans, Health Education Assistance Loans, and Nursing Student Loan Program loans may be consolidated only by lenders that have an agreement with the Department or a guaranty agency for that purpose. (PLUS Loans to students and ALAS are former names of the SLS Program.) A defaulted loan may be included in a consolidation loan if the borrower has made satisfactory repayment arrangements with the holder to repay the loan. Three on-time, consecutive monthly payments under a "satisfactory repayment arrangement" are required to consolidate a defaulted loan. Satisfactory repayment arrangements are discussed in Section 7 of this chapter. A borrower can also consolidate a defaulted loan without having to make three required payments, if he or she agrees to repay the Consolidation Loan under the income-sensitive repayment plan. Loan consolidation allows a lender to pay off the existing loans and make one Consolidation Loan to replace them. Consolidation may include, in addition to unpaid principal and interest on the underlying loans being consolidated, late charges and collection costs applied to those loans. A guaranty agency (or the Department, if it is holding the loan) may assess the borrower collection charges or late fees up to 18.5% of the outstanding principal and interest on the defaulted FFEL that is to be included in a Federal Consolidation Loan. A lender must offer standard, graduated, and income-sensitive repayment options on Consolidation Loans. APPLYING FOR A CONSOLIDATION LOAN Generally, a borrower submits a Consolidation Loan application to a lender holding at least one of the loans to be consolidated. If none of those lenders agrees to consolidation, the borrower may apply to any other lender participating in the Consolidation Loan Program. The borrower must give the lender all relevant information concerning his or her existing loans. A borrower may add to an existing Consolidation Loan eligible loans received before the date of consolidation, if the loans are added within 180 days after the date the Consolidation Loan is made. BORROWER ELIGIBILITY FOR A FEDERAL CONSOLIDATION LOAN To be eligible for a Consolidation Loan, a borrower - must be in the grace period or in repayment status on all loans being consolidated; - if in default,*1* - must have made satisfactory arrangements to repay the defaulted loan and must have made at least three on-time, consecutive monthly payments or - must agree to repay the Consolidation Loan under the income- sensitive repayment plan (with no payments required prior to consolidation); - must not have another Consolidation Loan application pending; - must agree to notify the loan holder of any address changes; and - must certify that the lender holds at least one of the borrower's outstanding loans that are being consolidated or that the borrower has unsuccessfully sought a Consolidation Loan from the holders of the outstanding loans and was unable to secure one. There is no longer a minimum debt level a borrower must have to qualify for consolidation. [[Married couple consolidating loans]] A married couple may consolidate individual loans if both spouses agree to be held jointly and separately liable for repayment of the Consolidation Loan regardless of the amount of their individual debts and regardless of any future change in marital status. If one spouse dies, becomes totally and permanently disabled, has collection of his or her loan obligation stayed by a bankruptcy filing, or has that obligation discharged in bankruptcy, the other borrower remains obligated to repay the loan. Both spouses must meet the eligibility requirements to qualify for a Consolidation Loan. Only one spouse is required to certify that the lender holds at least one of his or her outstanding loans that are being consolidated or that he or she has unsuccessfully sought a Consolidation Loan from the holders of the outstanding loans and was unable to secure one. Join consolidators are held jointly and severally liable for the Consolidation Loan. To receive a deferment, forbearance, or discharge, both borrowers must meet the qualifying conditions, unless a discharge is due to school closure or false certification. In that case, only one borrower must qualify; however, only the portion of the Consolidation Loan affected by the school closure or false certification can be discharged, unless the borrower's spouse qualifies for some type of discharge. [[Federal Direct Consolidation Loans]] If a borrower is unable to obtain a Consolidation Loan from a lender eligible to make such loans, the borrower may apply through the U.S. Department of Education for a Federal DIRECT Consolidation Loan under the William D. Ford Federal Direct Loan Program. The borrower must certify that he or she has been unable to obtain from an eligible lender a Consolidation Loan or a Consolidation Loan with income-sensitive repayment terms acceptable to the borrower. See Chapter 11 for more information on Federal Direct Consolidation Loans. The eligibility criteria for Federal Direct Consolidation Loans differ from the criteria listed below for Federal Consolidation Loans. REPAYMENT AND DEFERMENT Generally, the first payment on a Consolidation Loan is due within 60 days after consolidation. (The repayment period begins on the day the Consolidation Loan is disbursed.) There are a number of repayment options, including the graduated repayment and income- sensitive repayment options mentioned previously. The repayment period varies from 10 to 30 years, depending on the amount consolidated and on other student loans the borrower may have. If the amount to be consolidated is less than $7,500, for example, the repayment period must not exceed 10 years. [[Interest rate]] The interest rate for a Consolidation Loan is the weighted average of the interest rates of the loans consolidated (rounded to the nearest whole percent). When determining the weighted average of interest rates, the interest rate used for each loan is that which is in effect for it at the time the loan is paid in full through consolidation. There are no insurance premiums or other fees for loan consolidation. [[Interest subsidy]] A borrower is entitled to an interest subsidy during deferment ONLY when the Consolidation Loan is made up exclusively of subsidized Stafford Loans. For information on deferment provisions for Consolidation Loans, see Section 5 of this Chapter. A borrower interested in consolidation should understand that consolidating Perkins Loans (or NDSLs) will result in - a higher interest rate than he or she is paying on those loans, - less deferment provisions than he or she has available under the Perkins Loan (or NDSL) Program, and - the loss of Perkins Loan (or NDSL) cancellation provisions on the loans being consolidated. The student should also understand that consolidating Stafford Loans and SLS loans may result in higher interest rates than he or she was paying on those loans. However, because Consolidation Loans may have repayment periods as long as 30 years, the borrower's monthly repayment amount may be reduced. If a lender received a Consolidation Loan application before January 1, 1993, the borrower is responsible for the interest on the loan during periods of deferment. If a lender received a Consolidation Loan application between January 1, 1993 and August 10, 1993, interest that accrues during periods of deferment is paid by the federal government. For loan applications received on or after August 10, 1993, the borrower is entitled to an interest subsidy during deferment ONLY when the Consolidation Loan is made up exclusively of subsidized Stafford Loans. For information on deferment provisions of Consolidation Loans, see the deferment chart on page 10-64. *1* Note that a borrower who wishes to consolidate a loan on which a court judgment has been secured must sign a new promissory note for that loan prior to consolidating it. See page 10-77 for more information. |