EnterChapterTitle: William D. Ford Federal Direct Loan Program
SectionTitle: Direct Consolidation Loans
Direct Consolidation Loans allow Direct Loan and Federal Family
Education Loan (FFEL) borrowers to combine one or more federal
education loans and create one Direct Loan with one monthly
payment. Borrowers can extend their repayment periods, thereby
reducing monthly payments, and the interest rate may be lower.
TYPES OF DIRECT CONSOLIDATION LOANS
There are three types of Direct Consolidation Loans:
- Direct Subsidized Consolidation Loans,
- Direct Unsubsidized Consolidation Loans, and
- Direct PLUS Consolidation Loans.
Subsidized SFA loans can be consolidated into a Direct Subsidized
Consolidation Loan. Unsubsidized SFA loans, as well as certain
loans authorized under Titles VII and VIII of the Public Health
Service Act (administered by the U.S. Department of Health and
Human Services), can be consolidated into a Direct Unsubsidized
Consolidation Loan. Direct PLUS Loans and Federal PLUS Loans
can be combined into one Direct PLUS Consolidation Loan. See the
chart on the following page for a list of loans that can be
consolidated into each type.
Even if borrowers have loans from more than one loan type, they
receive only one Direct Consolidation Loan and make just one
monthly payment. However, the Department will track the parts of
the Direct Consolidation Loan separately because the type of loan
affects interest rates, interest subsidies, and deferment eligibility.
(For example, a borrower will not be required to pay interest during a
deferment on the subsidized portion of a Direct Consolidation Loan.)
[[The chart " Federal Education Loans Eligible for Direct Loan
Consolidation" on page 11-40 is currently unavailable for viewing.
Please reference your paper document for additional information.]]
Borrowers must consolidate at least one Direct Loan or FFEL*1* but
generally are not required to consolidate all their outstanding federal
education loans. For example, a borrower may choose not to
consolidate a loan with an interest rate lower than a Direct
Consolidation Loan's interest rate. A borrower may not, however,
exclude SFA loans in default unless he or she has met the
requirements for regaining SFA loan eligibility (see Section 2).
Nonfederal loans made by state or private lenders are not eligible for
There are no minimum or maximum loan limits that apply to Direct
Consolidation Loans. A Direct Consolidation Loan's principal
balance equals the sum of the amounts the Department pays to the
holders of the loans being consolidated. The Department pays each
holder the amount necessary to pay in full the loan being
Consolidation does not increase a borrower's aggregate loan limits
(see Section 2 for a discussion of loan limits). The aggregate limit for
undergraduate and graduate/professional students must include any
portion of a Direct Consolidation Loan used to repay a Direct
Subsidized or Unsubsidized Loan, a subsidized or unsubsidized
Federal Stafford Loan, or a Federal Supplemental Loans for Students
Direct Consolidation Loan interest rates are variable and adjusted
annually on July 1. Interest rates are determined on June 1 each year
and apply to the following 12-month period from July 1 to June 30.
Currently, there are two formulas for calculating the variable interest
rate for Direct Subsidized and Unsubsidized Consolidation Loans.
For loans first disbursed between July 1, 1995 and June 30, 1998 that
are in in-school, grace, or deferment periods, the interest rate equals
the bond equivalent rate of the 91-day Treasury bills auctioned at the
final auction before June 1, plus 2.5 percentage points. For loans first
disbursed between July 1, 1995 and June 30, 1998 that are NOT in
in-school, grace, or deferment periods, the interest rate equals the
bond equivalent rate of the 91-day Treasury bills auctioned at the
final auction before June 1, plus 3.1 percentage points. NOTE: THE
LATTER FORMULA ALSO APPLIES TO ANY DIRECT
SUBSIDIZED AND UNSUBSIDIZED LOAN FIRST DISBURSED
BEFORE JULY 1, 1995, IN ANY PERIOD. The maximum interest
rate is 8.25%.
Currently, the interest rate for Direct PLUS Consolidation Loans
equals the bond equivalent rate of the 52-week Treasury bills
auctioned at the final auction before June 1, plus 3.1 percentage
points. The maximum interest rate is 9%.
[[Change in interest rate calculations]]
Beginning July 1, 1998, interest rate calculations change. For Direct
Subsidized and Unsubsidized Consolidation Loans first disbursed on
or after July 1, 1998, the interest rate will equal the bond equivalent
rate of the security with a comparable maturity, that the Department
establishes, plus 1 percentage point. The rate will still be determined
on June 1 each year and apply to the following 12-month period
from July 1 to June 30. The rate will not exceed 8.25 percent. THIS
INTEREST RATE CALCULATION APPLIES WHETHER OR
NOT A LOAN IS IN AN IN-SCHOOL, GRACE, OR DEFERMENT
PERIOD. The calculation also applies to Direct PLUS Consolidation
Loans first disbursed on or after July 1, 1998, except the rate will
equal the bond equivalent rate of the security with a comparable
maturity, as established by the Department, plus 2.1 percentage
points. The rate will not exceed 9 percent.
During in-school, grace, and deferment periods, the Department does
not charge borrowers interest on Direct Subsidized Consolidation
Loans. Interest is charged during forbearance, however. Interest is
charged on Direct Unsubsidized Consolidation Loans and Direct
PLUS Consolidation Loans during all periods.
Borrowers may pay the interest for which they are responsible during
applicable periods or postpone paying it and have the interest
capitalized (added to the principal owed). See Section 2 for a
discussion of capitalizing interest.
ADDITIONAL BORROWING COSTS
[[No loan fee charged]]
Borrowers are not charged a loan fee for consolidating their loans.
The Department can charge late fees on all or part of any payments
the borrower does not pay within 30 days of the due date. The late
charge may not exceed six cents for each dollar of each late
installment. CURRENTLY, HOWEVER, THE DEPARTMENT IS
NOT CHARGING LATE FEES.
On a Direct Consolidation Loan NOT in default, the Department may
require the borrower or endorser to pay any costs, in excess of
routine collection costs, incurred in collecting installments not paid
when due. Such charges do not include the routine costs of preparing
letters or notices or making local or long-distance telephone calls. An
example of a non-routine collection cost is the cost of processing
checks returned for insufficient funds. On a Direct Consolidation
Loan in default, the Department requires the borrower or any
endorser to pay additional costs.
Borrowers must send a Direct Consolidation Loan application to the
Department's Loan Origination Center. A single consolidation
application is used, even if the borrower is consolidating more than
one type of loan, such as subsidized student loans and unsubsidized
student loans or subsidized student loans and PLUS Loans (if the
borrower has a loan for his or her dependent student as well as a loan
for him- or herself). The publication Direct Consolidation Loans: A
Guide explains the application process in detail.
Borrowers may add pre-existing eligible loans to a newly created
Direct Consolidation Loan without submitting a new application;
borrowers simply submit a request to the Department within 180
days after the loan is originated (see "Subsequent Consolidation" on
The two types of consolidation, "regular" and "in-school," are
discussed below. Basically, however, borrowers may consolidate
loans any time after they are fully disbursed. Note that married
borrowers may consolidate jointly. Borrowers in default also are
permitted to consolidate under certain circumstances (see page 11-
47). Consolidation eligibility criteria vary somewhat depending on
when borrowers consolidate and whether they are in default. All
Direct Consolidation Loan borrowers, however, receive the same
deferment, forbearance, and discharge provisions available to
borrowers of other Direct Loans (see Section 2). NOTE THAT A
BORROWER WHO CONSOLIDATES A LOAN THAT IS IN
DEFERMENT MUST REAPPLY FOR THE DEFERMENT ONCE
THE LOAN IS CONSOLIDATED.
[[Definition of in-school period]]
Many borrowers consolidate when their loans are no longer in an in-
school period, defined as the period before a loan enters the grace
period while a borrower is enrolled at least half time at an eligible
school. A loan is also considered to be in an in-school period if the
borrower entered but never completed the grace period because the
borrower reenrolled at least half time at an eligible school before the
grace period expired.
Borrowers consolidating at least one fully disbursed Direct Loan or
FFEL, neither of which is in an in-school period,*2* may
consolidate under what is known as the regular Direct Consolidation
Loan process. Borrowers may also include other student loans, such
as Federal Perkins Loans and eligible health professions student
loans (see the chart on page 11-40). (The status of the Direct Loan or
FFEL to be consolidated determines whether the borrower has a
regular or an in-school consolidation loan.)
[[Borrowers with no Direct Loans]]
A borrower with an outstanding FFEL but no outstanding Direct
Loan must meet one of two conditions to receive a regular Direct
Consolidation Loan: The borrower must be unable to obtain a
Federal Consolidation Loan after checking with a lender that makes
such loans; OR, if the borrower is eligible for the Income Contingent
Repayment Plan (see Section 2), he or she must be unable to obtain a
Federal Consolidation Loan with acceptable income-sensitive
repayment terms after checking with a lender that makes Federal
[[Married borrowers consolidating jointly]]
For married borrowers who want to consolidate jointly, only ONE
borrower must meet the conditions described in the preceding two
paragraphs. Joint consolidators are held jointly and severally liable
for their consolidation loan, however. BOTH borrowers must qualify
for deferment, forbearance, and discharge, unless a discharge is due
to school closure or false certification. In those two cases, only ONE
borrower has to qualify; however, only the portion of the Direct
Consolidation Loan affected by the school closure or false
certification can be discharged.
Nicholas receives two FFELs while attending Asta Institute.
Nicholas withdraws from Asta, enrolls in Fribitz Institute, and
takes out another FFEL. He and his wife Nora decide to
consolidate her Direct Loans and his FFELs into a joint Direct
Consolidation Loan. Fribitz closes three months later. Nicholas is
eligible to have his FFEL at Fribitz canceled, but he and Nora will
continue to be responsible for his other two FFELs that are part of
the Direct Consolidation Loan--those loans are unaffected by
TIP: Counsel married borrowers to decide carefully about joint
consolidation. If one spouse dies or becomes totally and
permanently disabled, for example, the other spouse is responsible
for paying the entire consolidation loan. The loan would be
discharged for a single borrower in such situations. Each spouse
may want to consolidate separately to minimize risk.
Regular consolidation requires that borrowers (BOTH borrowers, if
married and consolidating jointly) have no federal consolidation loan
applications pending with any other lenders (for example, a FFEL
Program lender). Also, borrowers must agree to notify the
Department of any address change.
[[No grace period]]
A regular consolidation loan's repayment period begins the day the
first disbursement is made; the first payment is due within 60 days of
that date, unless the borrower is in deferment on the consolidation
loan. There is no grace period.
[[Payments to original loan holders]]
Borrowers in repayment on any loans to be consolidated should
continue making payments to their current loan holders until
receiving written notice from the Department that it has consolidated
their loans. Once the loans are consolidated, any payments a
borrower makes to the original holders will be sent to the
Department to reduce the Direct Consolidation Loan balance.
In-school consolidation requires borrowers to meet the requirements
for regular consolidation, with some exceptions.
Unlike regular consolidation, borrowers eligible for in-school
consolidation may consolidate ONLY Direct Loans or FFELs; the
other types of federal education loans listed in the chart on page 11-
40 may be consolidated only after borrowers leave school.
Borrowers attending Direct Loan schools must consolidate at least
one fully disbursed Direct Loan or FFEL that is in AN IN-SCHOOL
PERIOD (see the definition of in-school period on page 11-43).
Borrowers attending non-Direct Loan schools must have a Direct
Loan AND must consolidate a Direct Loan or FFEL that is in an in-
school period. (Note that borrowers can qualify simply by
consolidating one Direct Loan that is in an in-school period.)
Married borrowers who wish to consolidate jointly must BOTH have
Direct Loans or FFELs in in-school periods. If a married borrower
attends a Direct Loan school but the spouse attends a non-Direct
Loan school, the spouse must have a Direct Loan and must
consolidate a FFEL or Direct Loan in an in-school period. (The
spouse can qualify simply by consolidating one Direct Loan that is in
an in-school period.)
Borrowers with no Direct Loans who want to consolidate FFELs
must be attending Direct Loan schools. (At least one FFEL must be
in an in-school period.) Such borrowers do not have to certify that
they have been unable to obtain Federal Consolidation Loans--FFEL
borrowers currently are not permitted under the Federal
Consolidation Loan Program to consolidate a loan in an in-school
The examples on the next page show how in-school consolidation
IN-SCHOOL CONSOLIDATION EXAMPLES
- Emma is in her third year at Woodhouse College (a Direct Loan
school). She is a three-quarter-time student and wants a Direct
Consolidation Loan for the two FFELs she received for the
previous two years at a different school. Emma has no Direct
Loans at Woodhouse.
Emma is eligible to receive a Direct Consolidation Loan for her
FFELs because she is attending a Direct Loan school and has a
fully disbursed FFEL in an in-school period.
- Elizabeth is in her first semester at Bennet University (a Direct
Loan school) and is enrolled full time. Elizabeth has three FFELs
she received before she transferred to Bennet (these loans are still
in an in-school period) and a Direct Loan she has received at
Bennet. Elizabeth wants to consolidate all four loans for
Elizabeth can receive a Direct Consolidation Loan only for the
three FFELs. The Direct Loan cannot be included because it has
not been fully disbursed, as Elizabeth is only in her first semester
at Bennet. She may want to apply for consolidation after her
Direct Loan is fully disbursed so that all four loans can be
- Richard has a Direct Loan he received two years ago at Lyon
College. He had been repaying that loan before enrolling at Van
Dam Institute, where he has been attending full time for two years.
He has an in-school deferment for his Direct Loan. He received a
FFEL for his first year of attendance at Van Dam, which does not
participate in Direct Loans. He would like to receive a Direct
Consolidation Loan for both loans.
Richard may receive a Direct Consolidation Loan for both loans.
He has a Direct Loan (the fact that the loan is not in an in-school
period does not matter), and he has an FFEL in an in-school
- Darrell attended Trundle University his first two years of school
but has transferred to National College (a Direct Loan school) and
is enrolled less than half time. He has two FFELs he received from
Trundle. Darrell wants to receive a Direct Consolidation Loan for
the FFELs because the interest rate would be more advantageous.
Darrell cannot receive an in-school Direct Consolidation Loan
because he does not have at least one Direct Loan or FFEL in an
in-school period (his enrollment as a less-than-half-time-student
means his loans are not in an in-school period). Darrell could
qualify for a regular Direct Consolidation Loan if, after checking
with an FFEL lender that makes Federal Consolidation Loans, he
cannot receive such a loan or cannot receive one with acceptable
income-sensitive repayment terms.
- Mitzi graduated from Muriel College with a degree in Biology.
She received two FFELs during her attendance. Three months
after graduation, she enrolls at Star College as a three-quarter-time
student to pursue a degree in Zoology. Star is a Direct Loan
school, but she has not taken out a Direct Loan. She would
nevertheless like to receive a Direct Consolidation Loan for her
FFELs because the repayment terms would be more favorable.
Mitzi may receive a Direct Consolidation Loan for her FFELs.
The loans are considered to be in an in-school period because
Mitzi has reenrolled in school at least half time after only three
months of her grace period have expired.
An in-school Direct Consolidation Loan receives a six-month grace
period when the borrower reduces enrollment to less than half time at
an eligible school. If the underlying loan(s) that is in an in-school
period enters the grace period after the Direct Consolidation Loan
application's submission but before the consolidation loan's first
disbursement, borrowers do not have to make payments on the loan
for the amount of time remaining in the grace period at the time of
the first disbursement.
On September 1 of his senior year at Gibbs College, a Direct Loan
school, Joseph applies for an in-school Direct Consolidation Loan
for two FFELs he has received. Two weeks after he applies, he
drops below half-time attendance. Joseph has not received his first
Direct Consolidation Loan disbursement. He receives the first
disbursement in early December. By that time, he has used 2 1/2
months of his grace period. Joseph has 3 1/2 months left in his
grace period before he must begin repayment on his Direct
PLUS Loan Consolidation
A parent who wants to consolidate Direct PLUS or Federal PLUS
loans must have at least one Direct PLUS Loan or have at least one
Federal PLUS Loan and have been unable to obtain a Federal
Consolidation Loan.3 The borrower must pass a credit check or must
either document extenuating circumstances or obtain an endorser
who can pass a credit check. (See Section 2 for more information on
these topics.) If married borrowers are consolidating PLUS loans
jointly, only ONE borrower needs to pass a credit check.
Consolidating Defaulted Loans
Generally, defaulted student loans may be consolidated if borrowers
agree either to repay the Direct Consolidation Loan under the
Income Contingent Repayment Plan or make satisfactory repayment
arrangements with the current loan holder.*4* However, the
borrower has only ONE option--to make satisfactory repayment
arrangements with the current loan holder--in the following two
- The borrower has a defaulted loan and at least one Direct Loan or
FFEL in an in-school period and wants an in-school consolidation
- The borrower wants to consolidate a defaulted PLUS Loan.
For purposes of consolidating a defaulted Direct Loan or FFEL,
satisfactory repayment arrangements are defined as THREE
consecutive, voluntary, on-time, full monthly payments that are
reasonable and affordable given the borrower's total financial
situation. Borrowers eligible to consolidate defaulted Perkins Loans
and health professions loans must contact the loan holders to
determine how a satisfactory repayment arrangement is defined.
[[Excluding defaulted loans]]
Borrowers may not exclude a defaulted SFA loan from consolidation
unless they have made repayment arrangements satisfactory to
REGAIN SFA ELIGIBILITY. For Direct Loans and FFELs, these
arrangements are the same as those described above, except
borrowers must make SIX payments instead of three. For Perkins
Loans, borrowers must repay the loan in full or sign a new
repayment agreement and make one payment each month for six
consecutive months. Note that regaining SFA eligibility does not
apply if only health professions loans are in default.
[[Collection costs for defaulted loans]]
For defaulted Direct Loans and FFELs, collection costs up to a
maximum of 18.5% of the outstanding principal and interest may be
added to the outstanding principal loan balance. For defaulted
Perkins Loans and health professions loans, collection costs equal to
the amount the borrower owes may be added to the outstanding
principal loan balance.
In general, a borrower may not consolidate ANY loan on which a
judgment has been obtained. For example, a borrower with a
judgment on a defaulted Direct Loan, FFEL, or Perkins Loan who
makes satisfactory repayment arrangements on the judgment for
purposes of regaining SFA eligibility may still not include the
judgment in a Direct Consolidation Loan. A borrower with a
judgment on a health professions loan who is not in default on any
SFA loan may consolidate all loans except the judgment.
Note that borrowers who have judgments on Direct Loans or FFELs
but who rehabilitate those loans may include them in a Direct
Consolidation Loan. (See Section 4 for a discussion of
rehabilitation.) Rehabilitation is NOT an option for Perkins Loans
and health professions loans.
A borrower may add pre-existing eligible loans to a Direct
Consolidation Loan within 180 days after the date the Direct
Consolidation Loan is made. A pre-existing eligible loan is one fully
disbursed before the Direct Consolidation Loan's first disbursement
is made. A borrower who listed the pre-existing loan as an
outstanding debt on the consolidation application may telephone the
Loan Origination Center to request that the loan be added. A
borrower who did not list the loan must submit a brief written request
that includes the loan information the consolidation application
After the Department verifies the additional loan, the borrower must
sign a promissory note for the additional amount before the
Department will pay off the holder. The loan disclosure issued when
the subsequent consolidation is completed will include the balance of
the newly consolidated loan.
If the original Direct Consolidation Loan required an endorser on the
PLUS portion of the loan and the borrower is adding a PLUS loan,
the same endorser must be used for the added PLUS loan. If an
endorser was not originally required but is required for the added
PLUS Loan, the endorser must agree to repay the ENTIRE Direct
PLUS Consolidation Loan.
A borrower who wants to consolidate additional eligible loans after
180 days must complete a new Direct Consolidation Loan
As mentioned earlier, a regular Direct Consolidation Loan's
repayment period begins the day the loan is first disbursed. If a
Direct Consolidation Loan includes at least one Direct Loan or FFEL
that is in an in-school period at the time the Department receives the
consolidation application, the repayment period begins the day after
the grace period ends.
The first payment on a Direct Consolidation Loan is due within 60
days of the loan's first disbursement, unless a borrower is eligible for
a deferment or the loan includes at least one Direct Loan or FFEL in
an in-school period and therefore qualifies for a grace period.
Direct Loan repayment plans and their requirements also apply to
Direct Consolidation Loans. See Section 2.
Borrowers may not choose the Income Contingent Repayment Plan
for Direct PLUS Consolidation Loans. Borrowers with these loans
may have two repayment plans if they want to repay their Direct
Subsidized Consolidation Loans and/or Direct Unsubsidized
Consolidation Loans under the Income Contingent Repayment Plan.
The length of a Direct Consolidation Loan repayment period under
each plan is the same as for non-consolidated Direct Loans. See
Section 2 for a list of the plans' maximum repayment periods.
[[Repayment period length]]
Section 2, page 11-26, shows the repayment period for the Extended
and Graduated repayment plans, based on the borrower's outstanding
loan balances. For Direct Consolidation Loans, outstanding balances
consist of all the borrower's Direct Consolidation Loans, Direct
Loans, and other education loans not made by an individual and not
in default (unless satisfactory repayment arrangements have been
made [see Section 2]). The total outstanding balance for the other
education loans used to determine an Extended or Graduate
repayment period may not exceed the amount of the Direct
The Department forwards a repayment schedule to the Direct
Consolidation Loan borrower before the first installment payment is
due. The schedule presents the borrower's monthly repayment under
the repayment plan selected. If a borrower then adds an eligible loan
to the consolidation, the Department adjusts the monthly repayment
amount (and, if necessary, the repayment period for loans in
Graduated or Extended repayment plans).
As is true for Direct Loans, a borrower who decides the repayment
plan selected for the Direct Consolidation Loan no longer meets his
or her needs can switch plans by calling or writing the Direct Loan
Servicing Center--as long as the new plan's maximum repayment
period is longer than the period the borrower's loan has already been
A borrower who had a defaulted loan and became eligible for a
Direct Consolidation Loan by agreeing to repay it under the Income
Contingent Repayment (ICR) Plan may switch to a plan other than
ICR if he or she
- was required to make, and did make, a payment under ICR in each
of the prior three months; or
- was not required to make payments but made three reasonable and
affordable payments in each of the prior three months.
In either case, a borrower must call or write the Direct Loan
Servicing Center to receive permission to make such a switch.
When a borrower wishes to consolidate a FFEL or other non-Direct
Loan, the loan holder must certify the loan amount and forward that
information to the Department within 10 business days of receiving
the Department's request for loan information. A loan holder that is
unable to provide the certification must explain the reason in writing
to the Department.
The holder must promptly use the Direct Consolidation Loan
proceeds received from the Department to discharge fully the
borrower's obligation on the loan that has become consolidated.
- If the amount the Department pays exceeds the amount owed, the
loan holder must refund the excess to the Department to be
credited against the outstanding balance of the Direct
- If the amount the Department pays is insufficient to pay off the
loan, the holder must notify the Department in writing of the
amount due so that the remainder can be paid.
The holder also is responsible for notifying the borrower that the
original loan has been paid in full.
[[Refunds from schools]]
If a holder of a loan that was consolidated receives a refund from a
school on that loan, the holder must transmit the refund to the
Department within 30 days of receipt. The lender must include an
explanation of the refund source.
*1* "Consolidating" one loan is generally done so the borrower can
receive a lower interest rate or other Direct Loan Program repayment
*2* Do not confuse "in-school period" with the borrower's
enrollment status. A borrower can be enrolled in an eligible school at
least half time and still consolidate under the regular Direct
Consolidation Loan process. For example, a borrower who enrolled
full time in an eligible school but had two FFELs in repayment
before enrolling would qualify under the regular consolidation
process. It is the status of the loans being consolidated that must be
*3* A parent borrower is not eligible for a Direct Consolidation
Loan based on being unable to obtain a Federal Consolidation Loan
with acceptable income-sensitive repayment terms--Direct PLUS
Loan borrowers are not eligible for the Income Contingent
*4* A student who does not have a Direct Loan must be unable to
obtain a Federal Consolidation Loan or be unable to obtain one with
acceptable income-sensitive repayment terms.