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ABSTRACT

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HE 033 118

Direct Consolidation Loan Guide for Schools.Department of Education, Washington, DC.2000-00-0044p.

U.S. Department of Education, Loan Origination Center,Electronic Data Systems, 231 Northeast Bypass, Warehouse #3,Bays 1-4, Montgomery, Alabama 36117.Guides Non-Classroom (055)MF01/PCO2 Plus Postage.Educational Finance; *Federal Aid; Federal Programs; HigherEducation; *Loan Default; *Loan Repayment; Need Analysis(Student Financial Aid); *Student Loan Programs*Family Education Loan Program; *Federal Direct Student LoanProgram; Loan Forbearance; Loan Forgiveness; Student LoanConsolidation Program

This guide is intended to help educational institutionscounsel students and parents about consolidation of federal education loansfor borrowers in repayment, borrowers in default, and borrowers who are stillin school. Through consolidation, borrowers may combine various types offederal education loans, including direct loans and loans made through theFederal Family Education Loan program. Consolidation may also extendrepayment periods, lower interest rates, and eliminate the need to deal withmultiple lenders. Following the introduction which covers the basics of loanconsolidation, advantages of loan consolidation, eligible and ineligibleloans, loan categories, and interest rates, other sections of the documentcover the following topics: (1) borrower eligibility; (2) rehabilitation vs.

consolidation; (3) how consolidation works; (4) repayment; (5) postponing

repayment; (6) default on a direct consolidation loan; (7) discharge of adirect consolidation loan; (8) consolidation of health professions loans; (9)

how to reach the direct loan program; (10) consolidation materials andpublications; and (11) a request for comments about the guide. (RH)

Reproductions supplied by EDRS are the best that can be madefrom the original document.

fE.a 4;

-AMA

LOAN GUIDEOP SCHOOLS

U.S. DEPARTMENT OF EDUCATIONOffice of Educational Research and Improvement

EDUCATIONAL RESOURCES INFORMATIONCENTER (ERIC)

--05 This document has been reproduced asreceived from the person or organizationoriginating it.

Minor changes have been made toimprove reproduction quality.

Points of view or opinions staled in thisdocument do not necessarily representofficial OERI position or policy.

Since January 1995, the U.S. Department of Education has beenconsolidating the federal education loans of borrowers inrepayment and borrowers in default. The Department also

consolidates education loans of borrowers who are still in school.

This guide will help you counsel borrowers who are in school, as wellas those in repayment or in default, based on their uniquecircumstances.

The guide is organized around borrower eligibility-Borrowers in School,Borrowers Out of School, and Borrowers in Default-rather than loantype, since some loans cannot be consolidated while a borrower is inschool. In addition, some eligible loans may lose benefits, while othersmay gain benefits only if consolidated while the borrower is in school.

If you have specific questions about eligibility, grace periods, interestrate computations, or anything else related to Direct ConsolidationLoans, please call the Loan Origination Center's, ConsolidationDepartment at 1-800-557-7392.

We welcome your recommendations for improvement and haveincluded a comment sheet for your suggestions.

CONTENTS

Introduction 1

The Basics 1

Advantages 1

Eligible Loans 3

Ineligible Loans 3

Loan Categories 3

Interest Rates 4

Borrower Eligibility 5

Student Borrowers 5

In school 5

Out of school 6

In default 7

Parent Borrowers 8

In school 8

Out of school 8

In default 9

Married Borrowers 10

In school 10In default 10

Rehabilitation vs. Consolidation 11

Rehabilitation 11

Advantages of Rehabilitation 11

Consolidation 12

Advantages of Consolidation 12

How Consolidation Works 13

Repayment 15

Repayment Plans 15

Choosing a Plan 21Changing Plans 21Making Payments 22

Postponing Repayment 23

Deferment 23Forbearance 25

Default on a Direct Consolidation Loan 26

Consequences of Default on a Direct Consolidation Loan 26

Discharge of a Direct Consolidation Loan 27

Conditions of Discharge on a Direct Consolidation Loan 27

Consolidation of Health Professions Loans 28

Health Professions Student Loans & Loans for Disadvantaged Students 28Health Education Assistance Loans 29HEAL Refinancing 29Nursing Student Loans 30

How to Reach Us 31

Consolidation Materials and Publications 33

Definitions 34

Please Tell Us What You Think 36

'OD

Students and parents gain a simple way to manage education debt with Federal DirectConsolidation Loans (Direct Consolidation Loans.) Through consolidation, borrowers maycombine various types of federal education loans, including Direct Loans and loans madethrough the Federal Family Education Loan (FFEL) Program. Consolidation may also extenda borrower's repayment period, lower his or her interest rate, and eliminate the hassle of dealingwith multiple lenders.

THE BASICS

+One Direct Loan or FFEL must beincluded in any Direct Consolidation Loan.

Borrowers who are consolidating all FFELloans that are in a grace or repaymentperiod must certify on the application thatthey have checked with a FFELconsolidation lender and (1) have beenunable to obtain a Federal ConsolidationLoan, or (2) have been unable to obtain aFederal Consolidation Loan with income-sensitive repayment terms acceptable tothem.' The reason why a borrower may beunable to obtain such a loan include but arenot limited to:(1) lenders requiring a minimum loanamount, and (2) some lenders not offeringincome-sensitive repayment terms.

Borrowers do not have to include all oftheir loans in the consolidation. Forinstance, a borrower might choose to leave aloan with a lower interest rate out of theconsolidation.

Borrowers may consolidate a single loan totake advantage of the benefits of the DirectConsolidation Loan Program.

There are no minimum or maximumamounts to consolidate and there is noconsolidation fee.

Borrowers may prepay a DirectConsolidation Loan at any time.

+Borrowers must notify the Department'sDirect Loan Servicing Center of anychanges. For instance, they must report achange of address, enrollment status, etc. Itis also vital that borrowers contact theDirect Loan Servicing Center when theyhave questions or problems making theirpayments.

ADVANTAGES

Consolidation holds many advantages forborrowers:

All Direct Loan borrowers send onemonthly payment to the Direct LoanServicing Center instead of multiplepayments to various lenders. TheDepartment of Education is the lender andthis will never change.

To update an address, change student statusor request deferment or forbearance forms,a borrower need only call one lender, theDepartment of Education's Direct LoanServicing Center.

+A Direct Consolidation Loan receives a six-month grace period if the borrower is

Borrowers with all Federal PLUS loans are not eligible for a Direct Consolidation Loan on the basis of not being able to obtain a FFEL Consolidation withincome-sensitive repayment terms acceptable to them. For a discussion of this requirement, see the comments on 34 CFR 685.2150(0(i)(B) at 59 FR 61683(December 1, 1994)

1

attending school, at least half-time and oneof the loans consolidated is in an in-schoolperiod at the time of application. Generally,a loan is considered to be in an "in-school"period if it is not in grace or repayment.

If the borrower does not meet the criteriafor an in-school consolidation, the firstpayment on the Direct Consolidation Loanis due within 60 days of the firstdisbursement of the loan.

A borrower with a Direct Loan or FFELloan in an in school or grace period mayalso benefit from a lower interest rate. Theinterest rate on Direct Consolidation Loansis based on the weighted average of theinterest rates on loans being consolidated.As of July 1, 2000, we calculate theweighted average of a borrower's loansusing the interest rate in effect on the datewe receive the application (reference GEN-00-06). If a borrower's application isreceived while they are in an in-school orgrace period, rather than in repayment, theymay receive a lower weighted averageinterest rate. The difference between aborrower's interest rate during their in-school and/or grace period, and during therepayment period can be as high as .6percentage points.

The formula for calculating the interestrate on subsidized and unsubsidized DirectLoans or FFELs, during the in-school andgrace periods, is the 91-day Treasury billrate plus 1.7 percentage points.

The formula for calculating the interestrate on subsidized and unsubsidizedDirect Loans or FFELs duringrepayment is the average 91-day Treasurybill rate plus 2.3 percentage points.

2

+A Direct Consolidation Loan may ease thestrain on a borrower's budget by loweringthe borrower's overall monthly payment.The minimum monthly payment on aDirect Consolidation Loan may be lowerthan the combined payments charged on aborrower's federal education loans.

A borrower may take advantage of otherbenefits upon entering repayment. Forinstance, borrowers who choose to repayusing the electronic debit feature willreceive a .25 percent discount on theirinterest rate.

Borrowers may choose from four differentrepayment plans and may switch plans atany time. The repayment period on aDirect Consolidation Loan may beextended up to a maximum of 30 yearsunder certain repayment plans, dependingon a borrower's debt, however, extendingthe repayment period will increase the totalinterest charged. The Income ContingentRepayment (ICR) Plan bases monthlypayments on a borrower's annual incomeand total loan amount.

Varied deferment options are available on aDirect Consolidation Loan. Borrowers maybe eligible for additional deferments if theyhave an outstanding balance on an FFELmade before July 1, 1993, when they obtaina Direct Consolidation Loan. (For more ondeferments, see Postponing Repayment,page 23.)

ELIGIBLE LOANS

A borrower may consolidate one or morefederal education loans into a DirectConsolidation Loan. These are the loanseligible for consolidation:

Direct Subsidized and Unsubsidized Loans+Federal Subsidized and Unsubsidized

Stafford Loans

Direct PLUS Loans and Federal PLUSLoans*

Direct Consolidation Loans and FederalConsolidation Loans

Guaranteed Student LoansFederal Insured Student Loans

Federal Supplemental Loans for StudentsAuxiliary Loans to Assist Students4Federal Perkins Loans*

National Direct Student Loans*National Defense Student Loans*

Health Education Assistance Loans*Health Professions Student Loans*Loans for Disadvantaged Students**Nursing Student Loans*

*Loans that are not eligible for in-school consolidation

INELIGIBLE LoAris

Some loans are always ineligible forconsolidation. While these loans may not beincluded in a Direct Consolidation Loan, theymay be considered in the calculation of aborrower's maximum repayment period underthe Graduated or Extended Repayment Plan.These include but are not limited to thefollowing:

Loans made by a state or private lender andnot guaranteed by the federal government

Primary Care LoansLaw Access LoansMedical Assist LoansPLATO Loans

3

LOAN CATEGORIES

The Direct Consolidation Loan Programgroups loans into three categories:

Direct Unsubsidized Consolidation Loans+Direct Subsidized Consolidation Loans

Direct PLUS Consolidation Loans

Most subsidized federal education loans canbe consolidated into a Direct SubsidizedConsolidation Loan category. Unsubsidizedfederal education loans can be consolidatedinto a Direct Unsubsidized ConsolidatedLoan category. And, Direct PLUS Loans andFederal PLUS Loans can be combined into aDirect PLUS Consolidation Loan category.

Borrowers who have loans from more thanone category still have only one DirectConsolidation Loan and make only onemonthly payment. The Direct LoanServicing Center keeps track of a DirectConsolidation Loan's different categories.Repayment and deferment options varydepending on the loan category.

INTEREST RATES

The interest rate for Direct ConsolidationLoans is based on the weighted average ofthe interest rates on loans being consolidated,rounded to the nearest higher one-eighth ofone percent. The rate is fixed and will notexceed 8.25%. The chart below describes howto calculate the weighted average interest rate.Borrowers may also use our interactivecalculator at www.loanconsolidation.ed.gov todetermine their weighted average interest rateand to see what their loan payments might beunder each of our four repayment plans.

Four steps to calculate the Weighted AverageInterest Rate

Step 1:Multiply each loan amount by its interest rateto obtain the "per loan weight factor".

Step 2:Add the per loan weight factors together.

Step 3:Add the loan amounts together.

Step 4:Divide the "total per loan weight factor" bythe total loan amount and then multiply by100.

Step 5:Round the result of Step 4 to the nearesthigher one-eighth of one percent if it is notalready at an eighth of a percent.

Total per loan weight factor X 100 = Weighted AverageTotal loan amount Rate*

*(Round to the nearest higher 118th of one percent)

4

9

I " p

Direct Consolidation Loans are available to a wide range of borrowers. The introductioncovered the basics. This section explains who is eligible.

In counseling borrowers on their eligibility for a Direct Consolidation Loan, a financial aidadministrator must determine the borrower type (student or parent) and then the borrowerstatus (in school, out of school, in default). Borrowers who are out of school include those ingrace, in repayment, or in deferment or forbearance. The following sections outline theeligibility requirements for both student and parent borrowers in each status and addressconcerns for married borrowers.

STUDENT BORROWERS

When applying for a Direct ConsolidationLoan, borrowers must meet the eligibilityrequirements for their status: in school, out ofschool, or in default.

In School

Borrowers are in school if they are attendingschool at least half time. They are eligible forin-school consolidation if they

are attending a Direct Loan school

and

include at least one Direct Loan or FFELin an in-school period

OR

are attending a non-Direct Loan school

and

have at least one Direct Loan

and

include at least one Direct Loan or FFEL inan in-school period.

5

A student loan is considered to be in an in-school period if it is not in grace orrepayment.

EXAMPLES:

A borrower who is attending a DirectLoan school half time and wishes toconsolidate all of her loans (two FFELsin an in-school period) is eligible for in-school consolidation.

However, a borrower who is attending anon-Direct Loan school half time andwishes to consolidate all of his loans(two FFELs in an in-school period) isNOT eligible for in-schoolconsolidation.

HINT: Borrowers who are applying foran in-school consolidation should applyafter their last loan is fully disbursedAND allow enough time for the LOCto receive the application BEFOREtheir last day of attendance in order totake advantage of the in-schoolconsolidation benefits.

10

Out of School

Borrowers are out of school if they are makingscheduled payments on their federal educationloans or they are in a period of grace,deferment, or forbearance. These borrowersare eligible to consolidate if they

have at least one Direct Loan

or

have at least one FFEL

and

have been unable to obtain a FederalConsolidation Loan with a FFELconsolidation lender or have been unable toobtain a Federal Consolidation Loan withincome-sensitive repayment terms acceptableto them.

6

EXAMPLES:

A borrower who recently graduated andwishes to consolidate a Direct Loanwith other federal education loans iseligible for a Direct ConsolidationLoan.

A borrower in repayment who wishes toconsolidate a FFEL with other federaleducation loans (no Direct Loans) andhas been unable to obtain a FederalConsolidation Loan is eligible for aDirect Consolidation Loan.

A borrower in repayment who wishes toconsolidate a FFEL with other federaleducation loans (no Direct Loans) andis able to obtain a Federal ConsolidationLoan is NOT eligible for a DirectConsolidation Loan.

HINT: Borrowers who apply duringtheir grace period go into repaymentwithin 60 days, forfeiting any remaininggrace period (reference GEN-00-07).Thus, borrowers who apply too early intheir grace period may not be able totake full advantage of their grace period.

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In Default

Borrowers who want to consolidate adefaulted loan(s) must meet additionalrequirements for eligibility. The followingrequirements are divided for borrowers withDirect Loans and borrowers with FFELs.Borrowers are eligible to consolidate adefaulted loan(s) if they

have at least one Direct Loan

and

agree to repay under the Income ContingentRepayment (ICR) Plan

or

have made satisfactory repaymentarrangements on the defaulted loan(s)

OR

have at least one FFEL

and

have been unable to obtain a FederalConsolidation Loan with a FFELconsolidation lender or have been unable toobtain a Federal Consolidation Loan withincome-sensitive repayment terms acceptableto them

and

agree to repay under the ICR Plan

or

have made satisfactory repayment arrangementson the defaulted loan(s).

For the purpose of consolidation, threeconsecutive, voluntary, on-time, full monthlypayments on a defaulted FFEL or Direct Loanconstitutes satisfactory repaymentarrangements. Borrowers must work with theircurrent loan holders to set up reasonable andaffordable payments. Borrowers who wish toconsolidate defaulted Perkins or healthprofessions loans should contact their loan

7

holders for information on satisfactoryrepayment arrangements under these programs.

Borrowers who have at least one in-schoolloan and one defaulted loan must meet anadditional requirement to consolidate while inschool: They must make satisfactory repaymentarrangements on their defaulted loans orexclude them from the consolidation.

EXAMPLES:

A borrower who wishes to consolidate adefaulted Direct Loan or FFEL andcannot afford to make satisfactoryrepayment arrangements may includethe defaulted loan in the DirectConsolidation Loan provided theborrower is eligible and agreed to repayunder the ICR Plan.

A borrower who wishes to consolidate adefaulted Direct Loan or FFEL loanand repay under the Standard, Extendedor Graduate Repayment Plan must firstmake satisfactory repaymentarrangements.

NOTE: Borrowers who are in defaultalso should be made aware of theaddition of collection costs to their loan.When a defaulted Direct Loan or FFELis included in a Direct ConsolidationLoan, collection costs of up to 18.5percent of the outstanding principal andinterest are added to the outstandingbalance. When Perkins Loans andhealth professions loans areconsolidated, collection costs are addedthen also. However, collection costs onthese loans may exceed 18.5 percent ofthe outstanding principal and interest.

NOTE: A defaulted Direct ConsolidationLoan that originally included a defaultedloan(s) may not be consolidated again.

12

PARENT BORROWERS

Parent borrowers have at least one DirectPLUS Loan or Federal PLUS Loan tofinance their child's education. Whenapplying for a Direct Consolidation Loan,these borrowers must meet the eligibilityrequirements for their status: in-school, out-of-school, and/or in default.

In. School

Parent borrowers who are also students mayconsolidate in school. While a PLUS Loandoes not qualify as an "in-school" loan, parentborrowers may have other eligible loans in anin-school period. These borrowers must thenmeet the in-school requirements identified forstudent borrowers on page 5.

Out of School

Parent borrowers are out of school if theyhave only PLUS loans or have PLUS loansand student loans on which they are makingscheduled payments or are in a period ofgrace, deferment, or forbearance. Theseborrowers are eligible to consolidateif they

include at least one Direct Loan

include at least one FFEL

and

have been unable to obtain a FederalConsolidation Loan'.

Parent borrowers must also meet creditrequirements. They are eligible for a DirectConsolidation Loan if they

do not have an adverse credit history

have an adverse credit history

and

obtain an endorser who does not have anadverse credit history for the PLUS part of

the consolidation loan

or

document extenuating circumstances.

EXAMPLES:

A parent borrower in repayment who does not have an adverse credit history and who hasbeen unable to obtain a Federal PLUS Consolidation Loan is eligible for a DirectConsolidation Loan.

A parent borrower in repayment who wishes to consolidate a Direct PLUS Loan, but hasan adverse credit history, must obtain an endorser for the PLUS portion of the DirectConsolidation Loan or document extenuating circumstances to the Department.

Parent borrowers are not eligible for a Direct Consolidation Loan on the basis of being unable to obtain a Federal Consolidation Loan with income-sensitive terms acceptable to them because they are not eligible for the Income Contingent Repayment Plan.

8 13

In Default

Parent borrowers who want to consolidate adefaulted loan(s) must meet additionalrequirements to consolidate the loan. Theyare eligible to consolidate a defaulted loan(s)if they

have at least one Direct Loan

and

have made satisfactory repaymentarrangements on the defaulted loan(s)

0

have at least one FFEL

and

have been unable to obtain a FederalConsolidation Loan' from a FFEL

consolidation lender

and

have made satisfactory repaymentarrangements on the defaulted loan(s).

For the purpose of consolidation, threeconsecutive, voluntary, on-time, full monthlypayments on a defaulted Direct Loan orFFEL Program loan constitute satisfactoryrepayment arrangements. Borrowers mustwork with their current loan holders to set upreasonable and affordable payments.

(Borrowers who are in default on other federaleducation loans must contact their currentloan holders to determine how those loanholders define satisfactory repaymentarrangements.)

Parent borrowers who are in default on astudent loan (not a PLUS Loan) may chooseto repay that loan under the ICR Plan ormake satisfactory repayment arrangements;either will satisfy the eligibility requirement.

Parent borrowers in default must still undergoa credit check. Any defaulted loans willappear on a borrower's credit report. Parentborrowers with an adverse credit history areeligible for a Direct Consolidation Loan onlyif they

obtain an endorser who does not have anadverse credit history for the PLUS part of

the consolidation loan

or

document extenuating circumstances.

Parent borrowers who have at least one in-school loan and one defaulted loan must makesatisfactory repayment arrangements toconsolidate while in school. They must thenmeet the in-school requirements for studentborrowers on page 5.

EXAMPLES:

A parent borrower who wishes toconsolidate defaulted Direct PLUSLoans, has made satisfactory repaymentarrangements with the Direct LoanServicing Center, and has obtained aneligible endorser may include thedefaulted loans in a DirectConsolidation Loan.

A parent borrower who wishes toconsolidate defaulted Federal PLUSLoans, has made satisfactory repaymentarrangements with her FFEL loanholder, has been unable to obtain aFederal Consolidation Loan, and hasobtained an eligible endorser mayinclude the defaulted leans in a DirectConsolidation Loan.

( NOTE: A defaulted Direct ConsolidationLoan that originally included a defaultedloan(s) may not be consolidated again.

' Parent borrowers are not eligible for a Direct Consolidation Loan on the basis of being unable to obtain a Federal Consolidation Loan with income-sensitive terms acceptable to them because they are not eligible for the Income Contingent Repaym1P4n.

9

MARRIED BORROWERS

Married borrowers are eligible for jointconsolidation if either borrower

includes a Direct Loan

OR

includes a FFEL

and

has been unable to obtain a FederalConsolidation Loan with a FFELconsolidation lender; or, if eligible for theICR Plan, has been unable to obtain a FederalConsolidation Loan 'with income-sensitiverepayment terms acceptable to them.

In School

If applying for in-school consolidation, bothmust meet the in-school requirements forstudent borrowers on page 5.

In Default

If including a defaulted loan, a couple mustmeet the requirements on pages 7 and 9.

If applying to consolidate PLUS Loans andboth spouses have an adverse credit history, acouple needs only one endorser.

10

Married borrowers should becounseled to weigh carefully theirdecision to consolidate jointly. Bothborrowers must qualify for deferment,forbearance, and certain discharges. Ifone spouse dies or becomes permanentlydisabled, the other spouse is stillresponsible for repayment of the entireconsolidation loan. On the other hand,when a single borrower dies or becomespermanently disabled, the consolidationloan is discharged. If the case ofdivorce, the consolidation loan cannotbe unconsolidated. Both parties areaccountable for the entire consolidationloan until it is paid in full. Thus, eachspouse may want to consolidateseparately to minimize risk.

15

Consolidation has specific advantages, disadvantages, and restrictions for borrowers in default.In addition, borrowers in default must be made aware of the advantages of rehabilitating theirloans. The following section addresses rehabilitation versus consolidation.

REHABILITATION

While consolidation holds many advantagesfor borrowers in default, borrowers shouldfirst consider rehabilitation, in which a loan isbrought, out of default and the defaultnotation is removed from the borrower's creditrecord. Direct Loans, Perkins Loan(s) andFFELs are eligible for rehabilitation.

To rehabilitate a Direct Loan, a borrowermust make 12 reasonable and affordable,consecutive, voluntary, on-time, fullmonthly payments to the Department ofEducation.

*To rehabilitate a Perkins Loan, a borrowermust make 12 consecutive, voluntary, ontime, full monthly payments as defined bythe lending institution, to the holder of thedefaulted loan.

To rehabilitate a FFEL, a borrower mustmake 12 reasonable and affordable,consecutive, voluntary, on-time, fullmonthly payments to the holder of thedefaulted loan, and the loan must be resold.Payments secured from a borrower on aninvoluntary basis, such as through wagegarnishment or litigation, cannot becounted toward the borrower's 12 payments.The reasonable and affordable paymentamount must be more than the amount ofthe involuntary payment.

A borrower who wishes to rehabilitate aFFEL on which a judgment has beenentered must sign a new promissory noteprior to the sale of the loan to an eligiblelender. A borrower who wishes to

11

rehabilitate a Direct Loan on which ajudgement has been entered must also signa new promissory note.

NOTE: It has been a loan industrypractice not to repurchase FFELProgram loans with a balance of lessthan $1,500. If a FFEL Program loancannot be resold, it will not berehabilitated.

ADVANTAGES OF

REHABILITATION

A defaulted loan is reported to creditbureaus and may remain on a borrower'scredit report for up to seven years.Rehabilitation removes the default notationfrom a borrower's credit report.

d Rehabilitation reinstates a borrower'seligibility for Title IV aid. After sixpayments a borrower's eligibility is restored,but the borrower is expected to continuemaking payments toward rehabilitating theloan.

+A borrower is once again eligible fordeferment after rehabilitation.

Wage garnishment ends, and the InternalRevenue Service no longer withholds aborrower's income tax refund.

CONSOLIDATION

Consolidation may help a borrower whocannot rehabilitate a defaulted loan get backon track. Some of the advantages ofrehabilitation are available throughconsolidation.

ADVANTAGES OF

CONSOLIDATION

A defaulted loan is reported to creditbureaus and may remain on a borrower'scredit report for up to seven years.Consolidating a defaulted loan results in thecredit report bearing a notation that thedefaulted loan was paid in full. Thisnotation is preferable to an unpaid default,but it does not guarantee that lenders willnot deny future credit for items such asmortgages, auto loans or credit cards, basedon this notation.

+ Consolidation, like rehabilitation, reinstatesa borrower's eligibility for Title IV aid.

A borrower is once again eligible fordeferment after consolidation.

No payments are required as a pre-condition for consolidation if the borroweris eligible and agrees to repay under theICR Plan.

Wage garnishment ends, and the InternalRevenue Service no longer withholds aborrower's income tax refund.

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Borrowers in default also benefit from theadvantages available with all DirectConsolidation Loans, especiallyconvenience. To update an address, changestudent status or request deferment forms, aborrower need only call one loan holder, theDepartment of Education's Direct LoanServicing Center. A borrower no longer hasto keep track of multiple loans and lenders.

Borrowers who are in default should also bemade aware of the addition of collection coststo their loan. When a defaulted Direct Loanor FFEL is included in a DirectConsolidation Loan, collection costs of up to18.5 percent of the outstanding principal andinterest are added to the outstanding balance.When Perkins and health professions loansare consolidated, collection costs are addedthen also. But, collection costs on these loansmay exceed 18.5 percent of the outstandingprincipal and interest.

I I I A I '

When a borrower consolidates loans in the Direct Consolidation Loan Program, theDepartment of Education pays off the original federal education loans and originates a new loanfor the total amount of the loan(s) consolidated. Here's how that works:

Step 1: Application Review

We review the borrower's application andenter it into our system. If there is missing orincorrect information, we make three attemptsto contact the borrower. If these attempts areunsuccessful, the application is returned to theborrower with a cover letter that identifies theneeded information. The borrower has 14days to provide the information to us or his orher application is deactivated.

(-NOTE: If you want to order a limitedquantity of Direct Consolidation Loanapplications, please call 1-800-848-0978.

Step 2: Credit Check (for PLUSborrowers only)

If the application includes a PLUS Loan, weperform a credit check on the borrower. If theborrower passes the credit check, the borroweris notified and loan verification begins. If theborrower does not pass the credit check, wesend a letter that outlines his or her options.The borrower may appeal the credit check,document extenuating circumstances, obtainan eligible endorser for the PLUS part of theconsolidation loan, or exclude the PLUSLoan from the consolidation.

Step 3: Income ContingentRepayment Processing

If the applicant selects the IncomeContingent Repayment Plan, we forward hisor her "Consent to Disclosure of TaxInformation" form to the IRS for approval. Ifthe waiver is denied, we request additionalinformation (Alternative Documentation ofIncome) from the borrower.

Step 4: Loan Verification

We request verification of the information onthe borrower's application to determine eachloan's eligibility for consolidation and itspayoff balance. Currently, we electronicallyverify Direct Loans, defaulted loans held bythe Department, and loans held by SallieMae. For all other loans, we send averification certificate to each loan holder toobtain the required information. Schools willreceive verification certificates for PerkinsLoans that are included in the consolidation.Loan holders have ten days to complete theverification certificate and return it to us at:

U.S. Department of EducationConsolidation DepartmentLoan Origination CenterP.O. Box 1723Montgomery, AL 36102-1723

(-NOTE: There is a new electronicverification process that loan holdersmay elect to use in lieu of the paperverification certificate.

1318

Step 5: Loan Statement Created

A loan statement package is mailed to theborrower after his or her loans are verified.

The loan statement lists all loans that havebeen verified and included in the promissorynote. The borrower has ten days from thedate of the loan statement to provide us withthe information regarding any discrepanciesor to withdraw his or her application. If theLoan Origination Center does not hear fromthe borrower by the tenth calendar day,payoffs are disbursed.

Step 6: Payment to Loan Holders

If a loan is not in default, we mail a pay-offcheck to the loan holder or credit theborrower's Direct Loan account. If a loan is indefault, the Department's Debt CollectionService or the Guarantee Agency will receivean electronic payment manifest, SF-1081, forthe principal and interest, and a check for thecollection costs.

When a loan holder receives a payment fromthe Loan Origination Center, the loanholder(s) is required by regulation to fullydischarge the debt upon receipt of proceedsand notify the borrower that the loan(s) hasbeen paid in full even if we undepay the loan.[See 34 CFR 685.216 (f)(2)]

Any payment a borrower makes to theprevious loan holder(s) after the loan(s) ispaid off is forwarded to us as an overpayment.These payments are applied to theconsolidation loan balance. If our paymentdoes not satisfy the borrower's accountbalance, the loan holder is prohibited frombilling the borrower and must notify us of theunderpaid amount. We work with thelender(s) to resolve any underpayment oroverpayment issues.

14

Step 7: Account Set-Up

We forward payoff information to the DirectLoan Servicing Center once the borrower'sloan(s) is successfully consolidated. TheServicing Center sends the borrower a"Welcome" letter and repayment information.

This consolidation process generally takes 60-90 days. Unless the borrower is obtaining anIn-School Consolidation, he or she willreceive a bill within 60 days of the firstdisbursement of the Direct ConsolidationLoan.

NOTE: Borrowers are required tocontinue making payments with theircurrent lender(s) until they receivewritten notification that their loan(s)has been successfully consolidated.

NOTE: Borrowers have 180-days, afterthe first disbursement of theirconsolidation loan, to add a loan(s) tothe consolidation. After 180-days, theborrowers must complete a newapplication listing the existingconsolidation loan and the new loan(s).

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REPAYMENT

Direct Consolidation Loan can simplify repayment for borrowers because it providesconvenience and repayment plans that are designed to meet the needs of almost every borrower.When repaying a Direct Consolidation Loan, a borrower may choose from four repaymentplans. The following sections will help borrowers understand each available repayment plan anddecide which plan best fits their needs.

REPAYMENT PLANS

Before entering repayment, borrowers receiveinformation about the four repayment plansand are asked to select a plan:

Standard Repayment Plan: fixed monthlypayments for a maximum of 10 years

Extended Repayment Plan: fixed monthlypayments that are less than payments underthe Standard Plan with the repaymentperiod ranging from 12 to 30 yearsdepending on the total amount borrowed

Graduated Repayment Plan: monthlypayments that increase every two years withthe repayment period varying from 12 to 30years depending on the total amountborrowed

Income Contingent Repayment Plan(ICR): monthly payments that are based ona borrower's annual income, family size, andtotal Direct Loan debt, and are spread overa term of up to 25 years

15

The four repayment plans are available toborrowers of Direct Subsidized andUnsubsidized Consolidation Loans. DirectPLUS Loan borrowers may not choose theICR Plan.

Borrowers who consolidate more than oneloan type (subsidized, unsubsidized, andPLUS) will have only one DirectConsolidation Loan and will make only onepayment each month. In general, borrowerschoose one repayment plan. However,borrowers who consolidate PLUS Loans withstudent loans may repay the PLUS portionunder a different repayment plan.

Borrowers who do not choose a plan areassigned to the Standard Repayment Plan;however, borrowers may change plans at anytime.

Standard Repayment Plan

With the Standard Plan, borrowers makefixed monthly payments of at least $50 for upto 10 years. Borrowers pay less interest underthis plan than the other plans because therepayment period is shorter. In general, theshorter the repayment period, the lower thetotal interest paid. (See Example A below.)

EXAMPLE A

This example shows a Direct SubsidizedConsolidation Loan repaid at an 8.25percent interest rate under the StandardRepayment Plan for 10 years (120payments).

LoanAmount

BeginningMonthlyPayment

TotalAmountRepaid

$15,000 $184 $22,077*

115,000 in principal and $7,077 in interest

Extended Repayment Plan

With the Extended Plan, borrowers makefixed monthly payments of at least $50 over a12- to 30-year period, depending on theborrower's total education loan debt. (See thetable upper right.)

Education loans that are not included in theconsolidation may be considered whencalculating the length of repayment under theExtended Plan; however, they may not exceedthe amount of the Direct ConsolidationLoan. Borrowers with a small loan balancemay repay in less than 12 years.

16

EXTENDED /GRADUATED

REPAYMENT TABLE

Length ofAmount of Debt Repayment Period

May Not Exceed

Less than $10,000$10;000 $19,999$20,000 $39,999$40,000 $59,999$60,000 or more

12 years15 years20 years25 years30 years

Because most borrowers take longer than 10years to repay their loans under the ExtendedPlan, their monthly payments are lower thanthey would be with the Standard Plan.However, the amount borrowers repay isgreater because they pay more interest. (SeeExample B below.)

EXAMPLE B

This example shows a Direct SubsidizedConsolidation Loan repaid at an 8.25percent interest rate under the ExtendedRepayment Plan for 15 years (180payments).

LoanAmount

BeginningMonthlyPayment

TotalAmountRepaid

$15,000 $146 $26,196*

*15,000 in principal and $11,196 in interest

21

Income Contingent Repayment Plan

The ICR Plan gives borrowers the flexibilityto meet their obligations without causingthem financial hardship. A borrower'smonthly payment is based on annual AdjustedGross Income (AGI), family size, and thetotal amount of the borrower's Direct Loans.Income information is obtained from theInternal Revenue Service (IRS) or fromalternative documentation submitted by theborrower.

To participate in the ICR Plan, borrowers(and if married, their spouses) must sign theIncome Contingent Repayment Plan Consentto Disclosure of Tax Information form. Thisallows the IRS to release income informationto the Department of Education to calculatemonthly payments. Borrowers' monthlypayments are adjusted annually to reflectinflation, income and interest rate changes.

The monthly payment amounts for someborrowers may not be enough to cover theinterest accruing on their loans. Thissituation is referred to as negativeamortization. In such cases, the unpaidinterest is capitalized, added to the principalbalance, annually, not to exceed 10 percent ofthe original loan balance. Once thecapitalization limit has been reached, interestcontinues to accrue but is not capitalized.(The capitalization limit does not apply tointerest that accrues during deferment orforbearance.)

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The maximum repayment period for the ICRPlan is 25 years. Earlier payment periods forborrowers who began repaying in theStandard Plan or 12-year Extended Plancount toward the 25-year maximum. Earlierpayment periods in other plans do not counttoward the maximum. If a borrower has notfully repaid the Direct Consolidation Loanafter 25 years, the unpaid portion isdischarged. However, the borrower must paytaxes on the portion discharged.

Alternative Documentation ofIncome

Alternative documentation of income isrequired for borrowers in their first year ofrepayment, and for certain borrowers in theirsecond year of repayment because thereported AGI may not reflect their currentincome. Such documentation includes paystubs, canceled checks, or, if these areunavailable, a signed statement explainingincome sources. Alternative documentationof income does not apply to borrowers withnew consolidation loans if they have been inrepayment on their underlying loans for twoyears.

Other borrowers who may be required tosubmit alternative documentation of incomeinclude borrowers whose AGI does notreasonably reflect their current income. Inaddition, borrowers may choose to submitalternative documentation of current income,if special circumstances, such as loss ofemployment, warrant a payment adjustment.

23

Graduated Repayment Plan

Under the Graduated Plan, payments startout low and increase, generally, every twoyears. The length of the repayment periodvaries from 12 to 30 years, depending on theborrower's education loan debt. (See theExtended/Graduated Repayment Table onpage 16.)

Education loans that are not included in theconsolidation may be considered whencalculating the length of repayment under theGraduated Plan; however, they may notexceed the amount of the DirectConsolidation Loan.

This plan works for'borrowers who expecttheir income to increase steadily over time. Aborrower's monthly payment will be equal toeither the interest that accumulates on theborrower's loans or half of the payment theborrower would make each month using theStandard Plan. A borrower's monthlypayment will never increase more than 1.5times what the borrower would pay under theStandard Repayment Plan. Generally,borrowers repay more over the term of theloan in the Graduated Plan than in theExtended Plan. However, the GraduatedPlan offers lower payments when borrowersare just starting out in their careers. (SeeExample C upper right.)

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EXAMPLE C

This example shows a Direct SubsidizedConsolidation Loan repaid at an 8.25percent interest rate under theGraduated Repayment Plan for 15 years(180 payments).

LoanAmount

BeginningMonthlyPayment

EndingMonthlyPayment

TotalAmountRepaid

$15,000 $103 $244 $28,762*

*15,000 in principal and $13,762 in interest

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Calculating Payments

Until the Department receives incomeinformation from the IRS or alternativedocumentation of income, borrowers' monthlypayments are equal to the interest that accrueseach month. If they are unable to make theinterest-only payments, borrowers mayrequest a forbearance until their firstscheduled ICR payment is due.

Under the ICR plan, the monthly paymentwould be $0 for borrowers with income lessthan or equal to the U.S. Department ofHealth and Human Services poverty level fortheir family size. (See Direct Loan RepaymentBook for more information.) Borrowers whosecalculated monthly payment is greater than $0but less than $5 are required to make a $5monthly payment. Other borrowers must paythe calculated monthly payment.

Because the ICR Plan is designed to keeppayments affordable, it contains calculationsto protect low-income borrowers. Lowincome borrowers pay the lesser of:

the amount they would pay if they repaidtheir loan in 12 years, multiplied by anincome percentage factor that varies withtheir annual income, or

20 percent of their discretionary income (AGIminus the poverty level for their family size)

The monthly payment in Example D iscalculated as follows:

Step 1: Multiply the principal balance by theconstant multiplier for 8.25% interest(.0109621).(For constant multipliers, see theDirect Loan Repayment book).0.0109621 x 15,000 = 164.4315

Step 2: Multiply the result by the incomepercentage factor that corresponds tothe borrower's income. (For incomepercentage factors, see the DirectLoan Repayment book).89.77% (0.9089) x 164.4315 = $148

Step 3: Determine 20 percent ofdiscretionary income. (See theDirect Loan Repayment book forpoverty guidelines chart. We usedthe poverty guideline for a familysize of one.)($30,000 $8,050) x 0.20 ÷ 12 = $366

Step 4: Payment is the amount determinedin step 2 because it is less than 20percent of discretionary income.

EXAMPLE DThis example shows a borrower with a family size of one and a $30,000 AGI repaying a$15,000 Direct Subsidized Loan at an 8.25 percent interest rate under the ICR Plan.

LoanAmount

Adjusted Beginning Number of Years

Gross Income Monthly Payment in RepaymentTotal

Repayment

$15,000 $30,000 $148 14 $25,034*

*$15,000 in principal and $10,034 in interest

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Payments for Married Borrowers

The income of both spouses is consideredwhen a married borrower repays underthe ICR Plan, even if only one spouseconsolidates. Both incomes are consideredwhether a couple repays jointly or separatelyand whether they file joint or separate taxreturns. Further, a married borrower whosubmits alternative documentation of incomeis also required to submit alternativedocumentation of income for his/her spouse.(For more information on alternativedocumentation of income see page 18.)

The monthly payments for married borrowersrepaying jointly are based on their joint debtand income. While married borrowers arenot required to repay their loans jointly, it isimportant to remember that if only onespouse chooses to repay under ICR Plan,the AGI (or alternative documentation ofincome) for both spouses will be used todetermine a monthly payment.(See Example E below.)

The monthly payment in Example E iscalculated as follows:

Step 1: Add the Direct Loan balances of thehusband and wife together todetermine the aggregate loan balance.$5,000 + $10,000 = $15,000

Step 2: Multiply the principal balance by theconstant multiplier to 8.25% interest(.0109621).(For constant multipliers, see theDirect Loan Repayment book.)0.0109621 x 15,000 = 164.4315

Step 3: Multiply the result by the incomepercentage factor that corresponds tothe joint income. (For incomepercentage factors, see the DirectLoan Repayment book.)79.91% (0.7991) x 164.4315 = $129

Step 4: Determine 20 percent ofdiscretionary income. (See theDirect Loan Repayment book forpoverty guidelines chart. We use thepoverty guideline for a family size of two.)

($25,000 $10,850) x 0.20 =12 = $236

Step 5: Payment is the amount determined instep 3 because it is less than 20percent ofdiscretionary income.

EXAMPLE E

This example shows a married couple with a family size of two and a $25,000 AGI. Theyare jointly repaying a $15,000 Direct Subsidized Consolidation Loan ($10,000 for onespouse and $5,000 for the other) at an 8.25 percent interest rate under the ICR Plan.

Loan Adjusted Beginning Number of Years TotalAmount Gross Income Monthly Payment in Repayment Repayment

$15,000 $25,000 $129 17 $27,974*

*$15,000 in principal and $12,974 in interest

2025

CHOOSING A PLAN

Borrowers may compare monthly paymentsand the total amount repaid under the variousrepayment plans by using our interactivecalculator at www.loanconsolidation.ed.gov.However, the choice of a repayment planshould not be solely based on the monthlypayment. Each plan has specific advantages.

The Standard Plan has a shorter repaymentperiod than other repayment plans.Borrowers pay off their loan(s) quicker andpay less interest than under the other plans.However, the Standard Plan may requirehigher monthly payments.

Borrowers who expect to have a good incomebenefit from the Standard Plan. Borrowerswho think a higher monthly payment may bedifficult to manage or who are unsure of theirincome are better off with another plan.

The Extended and Graduated plans havelonger repayment periods than the StandardPlan. Thus, borrowers will likely have lowermonthly payments but will pay more interestover the life of the loan. Payments are fixedunder the Extended Plan, and borrowersgenerally pay less interest under the ExtendedPlan than under the Graduated Plan.

The Standard and Extended plans offerborrowers fixed payments. However,borrowers who prefer to initially make smallerpayments first and larger payments as theirincome increase may benefit from theGraduated Plan.

Borrowers who select the ICR Plan havemonthly payments that vary with their annualincome. Borrowers with low incomes willhave longer repayment periods than theywould have under another plan. As a result,borrowers pay more in interest, but shouldhave an easier time keeping up with monthlypayments allowing them to avoid default.

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As a borrower's income increases, the monthlypayment increases. The increase in monthlypayment decreases the repayment period andthe interest paid over time. Borrowers whowant manageable monthly payments based ontheir income will benefit from the ICR Plan.

7.--( NOTE: Direct PLUS Consolidation

Loans are not eligible for ICR.

CHANGING PLANS

Most borrowers may change repayment plansat any time. Borrowers who were required torepay under the ICR plan must make threeconsecutive monthly payments beforeswitching to another plan. There is no limitto the number of times borrowers may changeplans.

A borrower may change to the ICR plan atany time. After the switch, the borrower'srepayment period will be 25 years, less anytime spent in the ICR, Standard, and 12-year Extended plans. Time spent in theExtended Plan under the 15- to 30-yearperiods and in the Graduated Plan does notcount toward the 25-year maximum.

A borrower may change to another plan aslong as the new plan has a repayment termlonger than the amount of time theborrower has already spent in repayment.For example, a borrower in the ExtendedPlan may only change to the Standard Planif the borrower has spent fewer than 10years in repayment. The new repaymentterm will be determined by subtracting theamount of time a borrower has spent inrepayment from the term allowed under thenew plan. For example, a borrower who hasspent three years in the Extended Planwould have a new seven-year repaymentperiod under the Standard Plan.

MAKING PAYMENTS

For most borrowers, repayment begins 60

days after the first disbursement on the DirectConsolidation Loan. For borrowers with anIn-school Direct Consolidation Loan,repayment begins after their six-month graceperiod expires. (If the borrower's enrollmentstatus changes to less than half-time after theapplication but prior to the first disbursementof the Direct Consolidation Loan, the DirectConsolidation Loan will receive a graceperiod equal to the number of months ofgrace remaining when the first disbursementis made.)

Borrowers will receive a monthly billingstatement from the Direct Loan ServicingCenter, unless the borrower is repaying theDirect Consolidation Loan using ElectronicDebit Account (EDA).

Borrowers who choose to repay using EDAwill receive a .25 percent discount on theirinterest rate for as long as they continue tomake payments this way.

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Borrowers can prepay a Direct ConsolidationLoan at any time without penalty. If aborrower makes a payment that exceeds therequired monthly payment, the prepaymentwill be applied first to any charges orcollection costs, then to outstanding interest,and last to principal. However, if a borrower'saccount has no outstanding interest, theprepayment is applied entirely to principal. Ifthe prepayment is twice the borrower'smonthly payment, the next payment due dateis advanced unless the borrower specifiesotherwise. The borrower will be notified of a .

revised due date.

Borrowers must keep the Direct LoanServicing Center informed of any name oraddress changes. Borrowers are responsiblefor making payments on time regardless ofwhether they receive billing statements.Borrowers should send payments to:

U.S. Department of EducationDirect Loan Payment Center

P.O. Box 530260

Atlanta, GA 30353-0260

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I I $

Borrowers who are having trouble making their monthly payments may be able to postponerepayment by requesting a deferment or forbearance. Each has separate conditions andrequirements.

DEFERMENT

Borrowers who qualify for a deferment maytemporarily postpone payments on their loan.The federal government pays the interestcharged on subsidized consolidation loansduring a deferment, but the borrower isresponsible for interest charged onunsubsidized and PLUS consolidation loans.The borrower may either pay the interest as itaccrues or allow it to accumulate andcapitalize when the deferment period ends.For borrowers whose consolidation loancontains subsidized, as well as unsubsidizedand PLUS portions, interest is charged onlyon the unsubsidized and PLUS portionsduring periods of deferment.

7 NOTE: The length of a repaymentperiod does not include periods ofdeferment.

Deferments are available for DirectConsolidation Loan borrowers who meet atleast one of the following conditions:

+The borrower is enrolled at least half-timeat an eligible school. There is no maximumeligibility limit for this deferment.(Borrowers participating in a medicalinternship or residency except for adentistry residency are not eligible for thisdeferment. For information on forbearance,see page 25.)

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The borrower is enrolled full time in agraduate fellowship program approved bythe Department of Education. There is nomaximum eligibility limit for thisdeferment.

The borrower is enrolled full time in arehabilitation training program that isapproved by the Department of Education.There is no maximum eligibility limit forthis deferment.

The borrower is unemployed and seekingbut unable to find full-time employment.Eligibility for this deferment is limited tothree years.

The borrower is experiencing or willexperience an economic hardship. Criteriafor this deferment include receivingpayment under a public assistance programor earning a salary below the poverty line.Contact the Direct Loan Servicing Centerfor more information or see 34 CFR685.204(b)(3) and 34 CFR 682.210(s)(6).

Borrowers who had an outstanding balance ona Federal Family EduCation Loan Program(FFEL) made before July 1, 1993, at the timethey obtained their Direct ConsolidationLoan may be eligible for additionaldeferments under the following conditions:

The borrower is serving in an eligibleinternship or residency program. Eligibilityfor this deferment is limited to two years.

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The borrower is temporarily totally disabledor is unable to work because the borrower isrequired to provide fill-time care for atemporarily totally disabled dependent orspouse. Eligibility for this deferment islimited to three years.

The borrower is teaching in a designatedteacher shortage area. Eligibility for thisdeferment is limited to three years, andDirect PLUS Consolidation Loans areineligible.

The borrower is serving in the U.S. ArmedForces, Peace Corps, or the CommissionedCorps of the Public Health Service, orserving as a fill-time paid volunteer for atax-exempt organization or an ACTIONprogram. Under certain circumstances,members of the reserve component of theNational Guard or the U.S. Armed Forceswho are on active duty may also qualify forthis deferment. Eligibility for thisdeferment is limited to three years.

The borrower is serving on active duty inthe National Oceanic and AtmosphericAdministration. Eligibility for thisdeferment is limited to three years, andDirect PLUS Consolidation Loanborrowers are ineligible.

The borrower is pregnant, caring for anewborn child, or caring for a newlyadopted child. The borrower must not beworking full time or attending school, butmust have attended at least half time withinthe six months preceding application forthis deferment. Eligibility for thisdeferment is limited to six months peroccurrence, and Direct PLUS ConsolidationLoan borrowers are ineligible.

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The borrower is the mother of a preschool-age child. The borrower must be workingat least 30 hours per week at a salary of nomore than $1 above the federal minimumwage. The borrower must also have enteredor reentered the work force within one yearpreceding application for this deferment.Eligibility for this deferment is limited toone year, and Direct PLUS ConsolidationLoan borrowers are ineligible.

PLUS borrowers who had an outstandingbalance on a FFEL made before July 1, 1993,at the time they obtained the DirectConsolidation Loan, may be eligible toreceive an Education Related Deferment ifthe dependent student for whom theyreceived the loans meets at least one of thefollowing conditions:

+The student is enrolled at least half-time atan eligible school.

The student is enrolled full time in anapproved graduate fellowship program.

The student is enrolled full time in anapproved rehabilitation training program.

NOTE: Married borrowers are eligiblefor a deferment on a joint consolidationloan only if both spouses are eligible fora deferment; however, they do not haveto meet the requirements for the samedeferment.

NOTE: Endorsers on Direct PLUSConsolidation Loans are not eligible fordeferments.

29

Borrowers who meet any of these conditionsand want to postpone repayment of their loanmust call or write the Direct Loan ServicingCenter to request the appropriate form.Borrowers must document that they meet therequirements for the deferment requested.The deferment form explains what supportingdocumentation or certification is needed.

NOTE: Borrowers will lose thedeferments that apply to theirunderlying loans and gain thedeferments available on a DirectConsolidation Loan when theyconsolidate. Borrowers should weighcarefully the advantages anddisadvantages when deciding whether ornot to consolidate.

FORBEARANCE

Borrowers who are willing but unable to makepayments and do not qualify for a defermentmay be eligible for forbearance. Forbearancemeans temporarily postponing payments ormaking smaller payments for a limited andspecified period of time. Interest is chargedon all Direct Consolidation Loans duringforbearance. While both principal andinterest payments are forborne, borrowers maychoose to pay the interest as it accumulates orhave it capitalized at the end of theforbearance period.

NOTE: Endorsers on Direct PLUSConsolidation Loans may be eligible forforbearance.

NOTE: The length of a repaymentperiod does not include periods offorbearance. J

Borrowers may request forbearance if theymeet at least one of the following conditions:

The borrower is experiencing financial orhealth problems.

The borrower is serving in a medical ordental internship or residency.

The borrower is serving in a position underthe National and Community Service TrustAct of 1993.

The borrower is obligated to makepayments on Title IV loans that are equal toor greater than 20 percent of the borrower'stotal monthly gross income. Eligibility islimited to three years.

NOTE: Married borrowers are eligiblefor forbearance on a joint consolidationloan only if both spouses meet therequirements for forbearance.

Borrowers who meet any of these conditionsand want to postpone repayment of their loanmust call or write the Direct Loan ServicingCenter to obtain the appropriate form.Borrowers must document that they meet therequirements for forbearance.

NOTE: Forbearances are granted forperiods of up to one year at a time.

3025

I I 1'A

I I'Borrowers who fail to make a payment on time are considered delinquent on a DirectConsolidation Loan. Borrowers who do not make payments for 270 days are in default.

CONSEQUENCES OF DEFAULT

ON A DIRECT

CONSOLIDATION LOAN

The consequences of default are severe andlong-lasting:

The Department of Education canimmediately demand repayment of the totalloan amount due.

The Department of Education will attemptto collect the debt and may charge theborrower collection costs.

The default will be reported to nationalcredit bureaus, and the borrower' creditrating will be damaged, making it difficultfor the borrower to make purchases such asa car or house.

Borrowers in default are ineligible for TitleIV student aid.

Borrowers in default are ineligible fordeferments.

The Internal Revenue Service can withholda borrower's federal income tax refund.

The borrower's wages may be. garnished.

26

It is important that borrowers stay in touchwith the Direct Loan Servicing Center.Default can occur when a borrower fails tokeep the Direct Loan Servicing Center up todate on address or name changes and billingstatements go astray. The Direct LoanServicing Center can offer alternatives when aborrower is having trouble making monthlypayments. Borrowers may apply for adeferment or forbearance, or changerepayment plans.

31

p

s el

Under a few special circumstances, a borrower's Direct Consolidation Loan may be discharged.This means a borrower is released from all obligations to repay the loan.

CONDITIONS OF DISCHARGE

ON A DIRECT

CONSOLIDATION LOAN

A borrower's loan may be discharged withproof of the following:

The borrower becomes totally andpermanently disabled. A physician mustcertify total and permanent disability. Also,the condition cannot have existed at thetime the borrower applied for the DirectConsolidation Loan, unless a doctorcertifies that the condition substantiallydeteriorated after the loan was made.

7NOTE: A borrower is considered totallyand permanently disabled if he/shewould be considered permanentlydisabled for all loans that were includedin the consolidation loan if those loanshad not been consolidated.Sec.685.212(b)(3)(i).)

The borrower's school closes or the schoolfalsely certifies a borrower's eligibility. If aparent has a PLUS Loan for the borrower,it will also be discharged.

The borrower's obligation to repay a loan isdischarged in bankruptcy (in rare cases).

( NOTE: Married borrowers whoconsolidate jointly are eligible fordischarge only if both meet therequirements for discharge, with theexception of a discharge for a closedschool or false certification of eligibility.

Borrowers may not avoid repaying their loansbecause they did not complete a course ofstudy (for reasons other than school closure orfalse certification), did not like a school orprogram, or did not obtain employment aftercompleting school.

+ The borrower dies. However, borrowerswho consolidate jointly agree to repay theentire consolidation loan if either spousedies.

+The borrower has not received a refundthat should have been made by the school.

27

NOTE: Borrowers who have FederalPerkins Loans are eligible forcancellation under other conditions,such as performing certain kinds ofpublic service. This benefit is lost whena Perkins Loan is included in a DirectConsolidation Loan.

32

CONSOLIDATION OF HEALTHPROFESSIONS LOANS

Differences exist between the Direct Consolidation Loan Program and the health professionsand nursing student financial aid programs because the former is authorized by the HigherEducation Act and the latter by the Public Health Service Act. Borrowers should be madeaware of the advantages and disadvantages of consolidating these types of loans because of thedifferences between the programs. They are outlined in the following sections.

HEALTH PROFESSIONS

STUDENT LOANS (HPSL) &LOANS FOR DISADVANTAGED

STUDENTS (LDS)

HPSL and LDS borrowers receive a one-year grace period. Direct ConsolidationLoans that include a HPSL or LDS do notqualify for a grace period.

To qualify for an in-school deferment,Direct Consolidation Loan borrowers mustbe attending at least half-time. HPSL andLDS borrowers are required to attendschool full time to be eligible for an in-school deferment.

For HPSL and LDS borrowers, the interestrate is fixed at 3, 5, 7, or 9 percentdepending on the date the loan was made.The interest rate on a Direct ConsolidationLoan is based on the weighted average ofthe interest rates on the loans beingconsolidated. It is a fixed rate with an 8.25percent cap.

28

Interest does not accrue on HPSL or LDSloans during periods of grace anddeferment. However, borrowers whoinclude a HPSL or LDS in a DirectConsolidation Loan are charged interestduring these periods. They may either paythe interest as it accumulates or allow it tocapitalize.

HPSL and LDS borrowers have 10 years torepay their loans. Direct ConsolidationLoan borrowers may choose from fourrepayment plans with 10 to 30 years torepay their loans depending on therepayment plan and how much they owe.

Borrowers who include a HPSL or LDS in aDirect Consolidation Loan do not retain thedeferments that apply to the healthprofessions loan. However, they gain thedeferments that apply to Direct ConsolidationLoans. They may be eligible for additionaldeferments if they have an outstandingbalance on an FFEL made before July 1,1993, when they obtain a DirectConsolidation Loan. (For more informationon deferments, see Postponing Repaymentpage 23.)

33

NOTE: HPSL and LDS borrowers maybe eligible for either a FederalConsolidation Loan or a DirectConsolidation Loan. In either case, theterms applying to the new consolidationloan supersede those of the underlyingloans. The repayment period starts over,and borrowers may apply for defermentsfor which the time limit had beenexhausted on their original underlyingloans.

HEALTH EDUCATIONASSISTANCE LOANS (HEAL)

HEAL borrowers receive a nine-monthgrace period. Direct Consolidation Loansthat include a HEAL do not qualify for agrace period.

To qualify for an in-school deferment,Direct Consolidation Loan borrowers mustbe attending an eligible school at leasthalf-time. HEAL borrowers are required toattend school full time to be eligible for anin-school deferment.

+HEALs may be offered as fixed or variablerate loans. The maximum interest rate on avariable rate HEAL is based on the average91-day Treasury bill rate plus 3 percentagepoints and is not capped. This rate isadjusted quarterly.

Actual HEAL interest rates are frequentlymuch lower than the maximum. Forexample, in Fiscal Year 1996 interest rateswere as low as the quarterly Treasury billrate plus 1.59 percentage points.

Some HEALs may be offered as fixedinterest rate loans. The interest rate cannotexceed the maximum interest rate assessedfor the quarter in which the borrowerobtains the HEAL.

29

The interest rate on a Direct ConsolidationLoan that includes a HEAL is based on theweighted average of the loans beingconsolidated. It is a fixed rate with an 8.25percent cap.

HEAL borrowers have from 10 to 25 yearsto repay their loans. Direct ConsolidationLoan borrowers may choose from fourrepayment plans with 10 to 30 years torepay their loans depending on therepayment plan and the loan amount.

Under the Direct Consolidation LoanProgram, HEAL borrowers may repayunder the ICR Plan for the entirerepayment period. HEAL lenders are onlyrequired to offer an ICR Plan for the firstfive years of repayment.

HEAL REFINANCING

Borrowers who have defaulted on a HEALmay include the collection costs and latefees in a Direct Consolidation Loan. Thesefees can not be included under HEALRefinancing.

Borrowers who include a HEAL in a DirectConsolidation Loan do not retain thedeferments that apply to the HEAL, asthey would under HEAL Refinancing.However, they gain the deferments thatapply to Direct Consolidation Loans. Theymay be eligible for additional deferments ifthey have an outstanding balance on anFFEL made before July 1, 1993, when theyobtain a Direct Consolidation Loan. (Formore on deferments, see Postponingrepayment page 23.)

34

NOTE: Under both the HEALRefinancing and Direct ConsolidationLoan programs, the terms applying tothe new loan supersede those of theunderlying loans. The repayment periodstarts over, and borrowers may apply fordeferments for which the time limit hadbeen exhausted on the underlying loans.

NURSING STUDENT

LOANS (NSL)

NSL borrowers receive a nine-month graceperiod. Direct Consolidation Loans thatinclude a NSL do not qualify for a graceperiod.

For NSL borrowers, the interest rate is fixedat 3, 5, or 6 percent depending on thedate the loan was made. The interest rateon a Direct Consolidation Loan thatincludes an NSL is based on the weightedaverage of the loans being consolidated. Itis a fixed rate with an 8.25 percent cap.

+Interest is not charged on NSLs duringperiods of grace and deferment. However,borrowers who include a NSL in a DirectConsolidation Loan are charged interestduring these periods. They may either paythe interest as it accumulates or allow it tocapitalize.

NSL borrowers have 10 years to repay theirloans. Direct Consolidation Loanborrowers may choose from four repaymentplans with 10 to 30 years to repay theirloans depending on the repayment plan andhow much they owe.

+Borrowers who include a NSL in a DirectConsolidation Loan do not retain thedeferments that apply to the NSL.However, they gain the deferments thatapply to Direct Consolidation Loans. Theymay be eligible for additional deferments ifthey have an outstanding balance on anFFEL made before July 1, 1993, when theyobtain a Direct Consolidation Loan. (Formore on deferments, see PostponingRepayment page 23.)

NOTE: NSL borrowers may be eligiblefor either a Federal Consolidation Loanor a Direct Consolidation Loan. Ineither case, the terms applying to thenew consolidation loan override some ofthe limits on the underlying loans. Therepayment period starts over, andborrowers may apply for deferments forwhich the time limit had beenexhausted.

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Direct Consolidation Loan Team ...334-206-7409 voice-.334-206-7709 fax

Program development and coordinationWorking hours from 8 a.m. to 4:30 p.m. (CST) Monday FridayMail correspondence to:

U.S. Department of EducationDirect Consolidation Loan Team

474 South Court StreetSuite 500

Montgomery, Alabama 36104

Visit our web site at http://loanconsolidation.ed.gov/

Applicant Services/Loan Origination (800) 557-7392 Voice(800) 557-7395 TDD

General information about consolidationEstimated repayment informationApplicationsReplacement formsQuestions about application processingWorking hours from 8 a.m. to 8 p.m. (EST) Monday-Friday

Mail applications, correspondence, repayment plan selection forms, disclosure of taxinformation (ICR) and alternate documentation of income (ADI) to:

William D. Ford Direct Loan ProgramP. 0. Box 242800

Louisville, KY 40224

Mail verification certificates, promissory notes and endorser addenda to:

William D. Ford Direct Loan ProgramP.O. Box 2007

Montgomery, AL 36102-2007

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Borrower Services/Loan Servicing (800) 848-0979 Voice(800) 848-0983 TDD

Payment informationChanging repayment plansDeferment and forbearanceAddress/name changesWorking hours from 8 a.m.Mail correspondence to:

Mail payments to:

forms

to 8:30 p.m. (EST) Monday-Friday

U.S. Department of EducationBorrower Services DepartmentDirect Loan Servicing Center

P.O. Box 4609Utica, NY 13504-4609

U.S. Department of EducationDirect Loan Payment Center

P.O. Box 530260Atlanta, GA 30353-0260

Telephone numbers and information are subject to change without notice

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The following Direct Consolidation Loan materials are currently available. You may order thesematerials for your students by calling the Direct Loan Origination Center at 1-800-848-0978.

+ Student Loan Driving You Crazy introduces borrowers to the Direct Consolidation LoanProgram, outlines the advantages of a Direct Consolidation Loan and eligibility requirements.

+ Federal Direct Consolidation Loan Application and Promissory Note Package includes a 12-pageinformation booklet on Direct Consolidation Loans, an Application and Promissory note,Instructions for completing the Application and Promissory Note, an Additional Loan Listingsheet, a Repayment Plan Selection form, and a Consent to Disclosure of Tax Information.

Updated information is also available on the Direct Consolidation Loan Web site. The addressis http://www.loanconsolidation.ed.gov.

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DEFINITIONS

Adverse Credit History:An applicant has an adverse credit historywhen he or she is 90 days or more delinquenton any debt or has been the subject of adefault determination, bankruptcy discharge,foreclosure, repossession, tax lien, wagegarnishment, or write-off of a Title IVeducation loan during the five years precedingthe credit report.

Capitalization:The addition of accrued interest to theprincipal of a loan, increasing the cost of theloan.

Constant Multiplier:A factor used to calculate payments at a giveninterest rate over a fixed period of time.

Default:Failure to repay a loan according to the termsof the promissory note. This failure mustpersist for 270 days.

Deferment:A temporary postponement of payments on aloan.

Discretionary Income:A borrower's federal Adjusted Gross Income(AGI) minus the U.S. Department of Healthand Human Services povertyLevel for the borrower's family size.

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Forbearance:A postponement of payments or a reductionin monthly payinents for a limited andspecified period of time during which aborrower is willing but unable to makepayments.

In-School Period:A student loan is considered to be in anin-school period if it is not in grace orrepayment.

Reasonable and Affordable Payments:The holder of a Direct Loan or FFELProgram loan determines what constitutes areasonable and affordable payment on a case-by-case basis. Loan holders considerdisposable income and such expenses ashousing, utilities, food, medical costs, work-related expenses, dependent care, and otherTitle IV education loans. Borrowers are thenprovided with a written statement of thepayment and an opportunity to object tothose terms.

Rehabilitation:The process of bringing a loan out of defaultand removing the default notation on aborrower's credit report. To rehabilitate adefaulted Direct Loan or Perkins Loan, aborrower must make 12 consecutive,voluntary, on-time, full monthly paymentsthat are reasonable and affordable given theborrower's total financial situation on thedefaulted loan. To rehabilitate a FFEL, aborrower must make 12 consecutive,voluntary, on-time, full monthly paymentsthat are reasonable and affordable given theborrower's total financial situation on thedefaulted loan, and the loan must be resold.

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Satisfactory Repayment Arrangements: Verification:

Under the Direct Loan and FFEL Programs, The process of requesting that a loan holderfor the purpose of consolidation, three certify a loan's payoff balance.consecutive, voluntary, on-time, full monthlypayments that are reasonable and affordablegiven the borrower's total financial situationconstitute satisfactory repaymentarrangements. For the purpose of restoringeligibility for Title IV student aid, sixconsecutive, voluntary, on-time, full monthlypayments that are reasonable and affordablegiven the borrower's total financial situationconstitute satisfactory repaymentarrangements. (Borrowers who are in defaulton other federal education loans must contacttheir current loan holders to determine howthose loan holders define satisfactoryrepayment arrangements.)

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I

e have updated this guide to reflect statutory and policy changes. We wouldlike to further improve this guide based on your comments. The text isprovided for your review. Please respond to the following questions and

email or fax your comments to us.

)=-- Are any questions left unanswered? If so, which ones?

)=-. Are any of the explanations confusing? If so, which ones

Should information on other topics be included? If so, which topics?

)=- Please include any other comments you have about this guide.

Please forward your comments to us.

Address:

Fax number:

U.S. Department of EducationConsolidation Work GroupROB-3, Room 56267th and D Streets, SWWashington, DC 20202-5404(202) 205-8072

Thank you for partnering with us!

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NOTES

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NOTES

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U.S. DEPARTMENT OF EDUCATIONLoan Origination CenterElectronic Data Systems231 Northeast BypassWarehouse #3, Bays 1-4Montgomery, Alabama 36117

FOR OFFICIAL BUSINESS ONLYPENALTY FOR PRIVATE USE $300

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