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 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
Loan (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.
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 1/8 , 1/4, 1/2, or 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. 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..
- 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.
The
points below must be evaluated when choosing a consolidation agency:
- What types
of loans am I interested in consolidating?
- How is
the interest rate being calculated? Agencies use the weighted
average of all your outstanding student loans to calculate a new
interest rate. This weighted average at the option of the agency
can be rounded up to the nearest 1/8, ¼, ½
or whole percent. They also have the option of offering a fixed
or variable interest rate.
- What are
the repayment incentives being offered? Some agencies will offer
to lower your interest rate for consecutive on-time monthly repayment
and additionally for having your payments taken directly from a
checking or savings account.
- Customer
service. It is very important that you be able to contact your
lenders regarding your account at a time that is convenient for
you. It is also important that the representatives are knowledgeable
regarding deferment and cancellation provisions. And above all,
they are courteous and sensitive to your needs.
As
a rule, Temple University does not recommend one agency over another,
but we will assist you in determining how consolidation can better assist
you in paying your student loan debt.
Below
is a list of student loan consolidators. This list does not represent
an endorsement by Temple University. This is a partial list
of companies that offer the consolidation service, please be sure to
check with your lenders/servicers to determine if they offer consolidation
as an option.
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