DIRECT CONSOLIDATIO

LOAN GUID

for SCHOOL
S

consolidating the federal education loans of borrowers in

repayment 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 well

as those in repayment or in default, based on their unique

circumstances.

The guide is organized around borrower eligibility-Borrowers in School,

Borrowers Out of School, and Borrowers in Default-rather than loan

type, since some loans cannot be consolidated while a borrower is in

school. In addition, some eligible loans may lose benefits, while others

may gain benefits only if consolidated while the borrower is in school.

If you have specific questions about eligibility, grace periods, interest

rate computations, or anything else related to Direct Consolidation

Loans, please call the Loan Origination Center’s, Consolidation

Department at 1-800-557-7392.

We welcome your recommendations for improvement and have

included a comment sheet for your suggestions.
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 ..............................................................................................................................10

In 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 ........................................................................................................................21

Changing Plans ........................................................................................................................21

Making Payments......................................................................................................................22
Conditions of a Direct Consolidation Loan ...................................................................

Consolidation of Health Professions Loans ...................................................................

Health Professions Student Loans & Loans for Disadvantaged Students .....................

Health Education Assistance Loans ...............................................................................

HEAL Refinancing .......................................................................................................

Nursing Student Loans...................................................................................................

How to Reach Us ...........................................................................................................

Consolidation Materials and Publications.......................................................................

Definitions.....................................................................................................................

Please Tell Us What You Think .....................................................................................
1

THE BASICS

❖One Direct Loan or FFEL must be

included in any Direct Consolidation Loan.

Borrowers who are consolidating all FFEL

loans that are in a grace or repayment

period must certify on the application that

they have checked with a FFEL

consolidation lender and (1) have been

unable to obtain a Federal Consolidation

Loan, or (2) have been unable to obtain a

Federal Consolidation Loan with incomesensitive repayment terms acceptable to

them.1 The reason why a borrower may be

unable to obtain such a loan include but are

not limited to:

(1) lenders requiring a minimum loan

amount, and (2) some lenders not offering

income-sensitive repayment terms.

❖Borrowers do not have to include all of

their loans in the consolidation. For

instance, a borrower might choose to leave a

loan with a lower interest rate out of the

consolidation.

❖Borrowers may consolidate a single loan to

take advantage of the benefits of the Direct

Consolidation Loan Program.

❖There are no minimum or maximum

amounts to consolidate and there is no

consolidation fee.

❖Borrowers may prepay a Direct

Consolidation Loan at any time.

❖Borrowers must notify the Department’s

Direct Loan Servicing Center of any

changes. For instance, they must report a

change of address, enrollment status, etc. It

is also vital that borrowers contact the

Direct Loan Servicing Center when they

have questions or problems making their

payments.

ADVANTAGES

Consolidation holds many advantages for

borrowers:

❖All Direct Loan borrowers send one

monthly payment to the Direct Loan

Servicing Center instead of multiple

payments to various lenders. The

Department of Education is the lender and

this will never change.

❖ To update an address, change student status

or request deferment or forbearance forms,

a borrower need only call one lender, the

Department of Education’s Direct Loan

Servicing Center.

❖A Direct Consolidation Loan receives a sixmonth grace period if the borrower is

1 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 with

income-sensitive repayment terms acceptable to them. For a discussion of this requirement, see the comments on 34 CFR 685.215(d)(l)(i)(B) at 59 FR 61683

(December 1, 1994)
2

❖A borrower with a Direct Loan or FFEL

loan in an in school or grace period may

also benefit from a lower interest rate. The

interest rate on Direct Consolidation Loans

is based on the weighted average of the

interest rates on loans being consolidated.

As of July 1, 2000, we calculate the

weighted average of a borrower’s loans

using the interest rate in effect on the date

we receive the application (reference GEN00-06). If a borrower’s application is

received while they are in an in-school or

grace period, rather than in repayment, they

may receive a lower weighted average interst

rate. The difference between a borrower’s

interest rate during their in-school and/or

grace period, and during the repayment

period can be as high as .6 percentage points.

Effective October 1, 1998 through 

June 30, 2003:

- The formula for calculating the interest

rate on subsidized and unsubsidized Direct

Loans or FFELs, during the in-school and

grace periods, is the 91-day Treasury bill

rate plus 1.7 percentage points.

- The formula for calculating the interest

rate on subsidized and unsubsidized

Direct Loans or FFELs during

repayment is the average 91-day Treasury

bill rate plus 2.3 percentage points.

receive a .25 percent discount on thei

interest rate.

❖Borrowers may choose from four diffe

repayment plans and may switch plan

any time. The repayment period on a

Direct Consolidation Loan may be

extended up to a maximum of 30 year

under certain repayment plans, depen

on a borrower’s debt, however, extend

the repayment period will increase th

interest charged. The Income Contin

Repayment (ICR) Plan bases monthl

payments on a borrower’s annual inco

and total loan amount.

❖Varied deferment options are availabl

Direct Consolidation Loan. Borrowe

be eligible for additional deferments i

have an outstanding balance on an FF

made before July 1, 1993, when they 

a Direct Consolidation Loan. (For m

deferments, see Postponing Repayme

page 23.)
3

❖Direct Consolidation Loans and Federal

Consolidation Loans

❖Guaranteed Student Loans

❖Federal Insured Student Loans

❖Federal Supplemental Loans for Students

❖Auxiliary Loans to Assist Students

❖Federal 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 LOANS

Some loans are always ineligible for

consolidation. While these loans may not be

included in a Direct Consolidation Loan, they

may be considered in the calculation of a

borrower’s maximum repayment period under

the Graduated or Extended Repayment Plan.

These include but are not limited to the

following:

❖Loans made by a state or private lender and

not guaranteed by the federal government

❖Primary Care Loans

❖Law Access Loans

❖Medical Assist Loans

❖PLATO Loans

Consolidation Loan category. Unsubsidized

federal education loans can be consolidated

into a Direct Unsubsidized Consolidated

Loan category. And, Direct PLUS Loans and

Federal PLUS Loans can be combined into a

Direct PLUS Consolidation Loan category.

Borrowers who have loans from more than

one category still have only one Direct

Consolidation Loan and make only one

monthly payment. The Direct Loan

Servicing Center keeps track of a Direct

Consolidation Loan’s different categories.

Repayment and deferment options vary

depending on the loan category.
4

Step 3:

Add the loan amounts together.

Step 4:

Divide the “total per loan weight factor

the total loan amount and then multiply 

100.

Step 5:

Round the result of Step 4 to the neare

higher one-eighth of one percent if it is 

already at an eighth of a percent.

gg

and to see what their loan payments might be

under each of our four repayment plans.

Total per loan weight factor X 100 = Weighted Average

Total loan amount Rate*

*(Round to the nearest higher 1/8th of one percent)
5

eligibility requirements for both student and parent borrowers in each status and address

concerns for married borrowers.

STUDENT BORROWERS

When applying for a Direct Consolidation

Loan, borrowers must meet the eligibility

requirements for their status: in school, out of

school, or in default.

In School

Borrowers are in school if they are attending

school at least half time. They are eligible for

in-school consolidation if they 

are attending a Direct Loan school

and

include at least one Direct Loan or FFEL 

in 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 in

an in-school period.

A student loan is considered to be in an inschool period if it is not in grace or

repayment.

EXAMPLES:

A borrower who is attending a Direct

Loan school half time and wishes to

consolidate all of her loans (two FFELs

in an in-school period) is eligible for inschool consolidation.

However, a borrower who is attending a

non-Direct Loan school half time and

wishes to consolidate all of his loans

(two FFELs in an in-school period) is

NOT eligible for in-school

consolidation.

HINT: Borrowers who are applying for

an in-school consolidation should apply

after their last loan is fully disbursed

AND allow enough time for the LOC

to receive the application BEFORE

their last day of attendance in order to

take advantage of the in-school

consolidation benefits.
6

have at least one FFEL

and

have been unable to obtain a Federal

Consolidation Loan with a FFEL

consolidation lender or have been unable to

obtain a Federal Consolidation Loan with

income-sensitive repayment terms acceptable

to them.

has been unable to obtain a Federal

Consolidation Loan is eligible for a

Direct Consolidation Loan.

A borrower in repayment who wishe

consolidate a FFEL with other feder

education loans (no Direct Loans) an

is able to obtain a Federal Consolida

Loan is NOT eligible for a Direct

Consolidation Loan.

HINT: Borrowers who apply during

their grace period go into repayment

within 60 days, forfeiting any remain

grace period (reference GEN-00-07)

Thus, borrowers who apply too early 

their grace period may not be able to

take full advantage of their grace per
7

defaulted Direct Loan or FFEL and

cannot afford to make satisfactory

repayment arrangements may include

the defaulted loan in the Direct

Consolidation Loan provided the

borrower is eligible and agreed to repay

under the ICR Plan.

A borrower who wishes to consolidate a

defaulted Direct Loan or FFEL loan

and repay under the Standard, Extended

or Graduate Repayment Plan must first

make satisfactory repayment

arrangements.

NOTE: Borrowers who are in default

also should be made aware of the

addition of collection costs to their loan.

When a defaulted Direct Loan or FFEL

is included in a Direct Consolidation

Loan, collection costs of up to 18.5

percent of the outstanding principal and

interest are added to the outstanding

balance. When Perkins Loans and

health professions loans are

consolidated, collection costs are added

then also. However, collection costs on

these loans may exceed 18.5 percent of

the outstanding principal and interest.

NOTE: A defaulted Direct Consolidation

Loan that originally included a defaulted

loan(s) may not be consolidated again.

agree to repay under the Income Contingent

Repayment (ICR) Plan

or

have made satisfactory repayment 

arrangements on the defaulted loan(s)

OR

have at least one FFEL

and

have been unable to obtain a Federal

Consolidation Loan with a FFEL

consolidation lender or have been unable to

obtain a Federal Consolidation Loan with

income-sensitive repayment terms acceptable

to them

and

agree to repay under the ICR Plan

or

have made satisfactory repayment arrangements

on the defaulted loan(s).

For the purpose of consolidation, three

consecutive, voluntary, on-time, full monthly

payments on a defaulted FFEL or Direct Loan

constitutes satisfactory repayment

arrangements. Borrowers must work with their

current loan holders to set up reasonable and

affordable payments. Borrowers who wish to

consolidate defaulted Perkins or health

professions loans should contact their loan
8

Parent borrowers who are also students may

consolidate in school. While a PLUS Loan

does not qualify as an “in-school” loan, parent

borrowers may have other eligible loans in an

in-school period. These borrowers must then

meet the in-school requirements identified for

student borrowers on page 5.

Out of School 

Parent borrowers are out of school if they

have only PLUS loans or have PLUS loans

and student loans on which they are making

scheduled payments or are in a period of

grace, deferment, or forbearance. These

borrowers are eligible to consolidate 

if they

requirements. They are eligible for a D

Consolidation Loan if they

do not have an adverse credit histor

OR

have an adverse credit history

and

obtain an endorser who does not hav

adverse credit history for the PLUS p

the consolidation loan

or

document extenuating circumstanc

EXAMPLES:

A parent borrower in repayment who does not have an adverse credit history and who 

been unable to obtain a Federal PLUS Consolidation Loan is eligible for a Direct

Consolidation Loan.

A parent borrower in repayment who wishes to consolidate a Direct PLUS Loan, but h

an adverse credit history, must obtain an endorser for the PLUS portion of the Direct

Consolidation Loan or document extenuating circumstances to the Department.

1 Parent borrowers are not eligible for a Direct Consolidation Loan on the basis of being unable to obtain a Federal Consolidation Loan with inc

sensitive terms acceptable to them because they are not eligible for the Income Contingent Repayment Plan.
9

arrangements on the defaulted loan(s)

OR

have at least one FFEL

and

have been unable to obtain a Federal

Consolidation Loan1 from a FFEL

consolidation lender

and

have made satisfactory repayment

arrangements on the defaulted loan(s).

For the purpose of consolidation, three

consecutive, voluntary, on-time, full monthly

payments on a defaulted Direct Loan or

FFEL Program loan constitute satisfactory

repayment arrangements. Borrowers must

work with their current loan holders to set up

reasonable and affordable payments.

(Borrowers who are in default on other federal

education loans must contact their current

loan holders to determine how those loan

holders define satisfactory repayment

arrangements.)

Parent borrowers who are in default on a

student loan (not a PLUS Loan) may choose

to repay that loan under the ICR Plan or

make satisfactory repayment arrangements;

either will satisfy the eligibility requirement.

document extenuating circumstances.

Parent borrowers who have at least one inschool loan and one defaulted loan must make

satisfactory repayment arrangements to

consolidate while in school. They must then

meet the in-school requirements for student

borrowers on page 5.

EXAMPLES:

A parent borrower who wishes to

consolidate defaulted Direct PLUS

Loans, has made satisfactory repayment

arrangements with the Direct Loan

Servicing Center, and has obtained an

eligible endorser may include the

defaulted loans in a Direct

Consolidation Loan.

A parent borrower who wishes to

consolidate defaulted Federal PLUS

Loans, has made satisfactory repayment

arrangements with her FFEL loan

holder, has been unable to obtain a

Federal Consolidation Loan, and has

obtained an eligible endorser may

include the defaulted leans in a Direct

Consolidation Loan.

NOTE: A defaulted Direct Consolidation

Loan that originally included a defaulted

loan(s) may not be consolidated again.

1 Parent borrowers are not eligible for a Direct Consolidation Loan on the basis of being unable to obtain a Federal Consolidation Loan with incomesensitive terms acceptable to them because they are not eligible for the Income Contingent Repayment Plan.
10

has been unable to obtain a Federal

Consolidation Loan with a FFEL

consolidation lender; or, if eligible for the

ICR Plan, has been unable to obtain a Federal

Consolidation Loan with income-sensitive

repayment terms acceptable to them.

In School

If applying for in-school consolidation, both

must meet the in-school requirements for

student borrowers on page 5.

In Default

If including a defaulted loan, a couple must

meet the requirements on pages 7 and 9.

If applying to consolidate PLUS Loans and

both spouses have an adverse credit history, a

couple needs only one endorser.

divorce, the consolidation loan canno

be unconsolidated. Both parties are

accountable for the entire consolidati

loan until it is paid in full. Thus, each

spouse may want to consolidate

separately to minimize risk.
11

While consolidation holds many advantages

for borrowers in default, borrowers should

first consider rehabilitation, in which a loan is

brought out of default and the default

notation is removed from the borrower’s credit

record. Direct Loans, Perkins Loan(s) and

FFELs are eligible for rehabilitation.

❖To rehabilitate a Direct Loan, a borrower

must make 12 reasonable and affordable,

consecutive, voluntary, on-time, full

monthly payments to the Department of

Education.

❖To rehabilitate a Perkins Loan, a borrower

must make 12 consecutive, voluntary, on

time, full monthly payments as defined by

the lending institution, to the holder of the

defaulted loan.

❖To rehabilitate a FFEL, a borrower must

make 12 reasonable and affordable,

consecutive, voluntary, on-time, full

monthly payments to the holder of the

defaulted loan, and the loan must be resold.

Payments secured from a borrower on an

involuntary basis, such as through wage

garnishment or litigation, cannot be

counted toward the borrower’s 12 payments.

The reasonable and affordable payment

amount must be more than the amount of

the involuntary payment.

❖A borrower who wishes to rehabilitate a

FFEL on which a judgment has been

entered must sign a new promissory note

prior to the sale of the loan to an eligible

lender. A borrower who wishes to

NOTE: It has been a loan industry

practice not to repurchase FFEL

Program loans with a balance of less

than $1,500. If a FFEL Program loan

cannot be resold, it will not be

rehabilitated.

ADVANTAGES OF

REHABILITATION

❖A defaulted loan is reported to credit

bureaus and may remain on a borrower’s

credit report for up to seven years.

Rehabilitation removes the default notation

from a borrower’s credit report.

❖Rehabilitation reinstates a borrower’s

eligibility for Title IV aid. After six

payments a borrower’s eligibility is restored,

but the borrower is expected to continue

making payments toward rehabilitating the

loan.

❖A borrower is once again eligible for

deferment after rehabilitation.

❖Wage garnishment ends, and the Internal

Revenue Service no longer withholds a

borrower’s income tax refund.
12

❖A defaulted loan is reported to credit

bureaus and may remain on a borrower’s

credit report for up to seven years.

Consolidating a defaulted loan results in the

credit report bearing a notation that the

defaulted loan was paid in full. This

notation is preferable to an unpaid default,

but it does not guarantee that lenders will

not deny future credit for items such as

mortgages, auto loans or credit cards, based

on this notation.

❖Consolidation, like rehabilitation, reinstates

a borrower’s eligibility for Title IV aid.

❖A borrower is once again eligible for

deferment after consolidation.

❖No payments are required as a precondition for consolidation if the borrower

is eligible and agrees to repay under the

ICR Plan.

❖Wage garnishment ends, and the Internal

Revenue Service no longer withholds a

borrower’s income tax refund.

to their loan. When a defaulted Direct 

or FFEL is included in a Direct

Consolidation Loan, collection costs of 

18.5 percent of the outstanding princip

interest are added to the outstanding ba

When Perkins and health professions lo

are consolidated, collection costs are add

then also. But, collection costs on these 

may exceed 18.5 percent of the outstand

principal and interest.
13

pp

enter it into our system. If there is missing or

incorrect information, we make three attempts

to contact the borrower. If these attempts are

unsuccessful, the application is returned to the

borrower with a cover letter that identifies the

needed information. The borrower has 14

days to provide the information to us or his or

her application is deactivated.

NOTE: If you want to order a limited

quantity of Direct Consolidation Loan

applications, please call 1-800-848-0978.

Step 2: Credit Check (for PLUS

borrowers only) 

If the application includes a PLUS Loan, we

perform a credit check on the borrower. If the

borrower passes the credit check, the borrower

is notified and loan verification begins. If the

borrower does not pass the credit check, we

send a letter that outlines his or her options.

The borrower may appeal the credit check,

document extenuating circumstances, obtain

an eligible endorser for the PLUS part of the

consolidation loan, or exclude the PLUS

Loan from the consolidation.

If the applicant selects the Income

Contingent Repayment Plan, we forward his

or her “Consent to Disclosure of Tax

Information” form to the IRS for approval. If

the waiver is denied, we request additional

information (Alternative Documentation of

Income) from the borrower.

Step 4: Loan Verification 

We request verification of the information on

the borrower’s application to determine each

loan’s eligibility for consolidation and its

payoff balance. Currently, we electronically

verify Direct Loans, defaulted loans held by

the Department, and loans held by Sallie

Mae. For all other loans, we send a

verification certificate to each loan holder to

obtain the required information. Schools will

receive verification certificates for Perkins

Loans that are included in the consolidation.

Loan holders have ten days to complete the

verification certificate and return it to us at:

U.S. Department of Education

Consolidation Department

Loan Origination Center

P.O. Box 1723

Montgomery, AL 36102-1723

NOTE: There is a new electronic

verification process that loan holders

may elect to use in lieu of the paper

verification certificate.
14

pp

Loan Origination Center does not hear from

the 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-off

check to the loan holder or credit the

borrower’s Direct Loan account. If a loan is in

default, the Department’s Debt Collection

Service or the Guarantee Agency will receive

an electronic payment manifest, SF-1081, for

the principal and interest, and a check for the

collection costs.

When a loan holder receives a payment from

the Loan Origination Center, the loan

holder(s) is required by regulation to fully

discharge the debt upon receipt of proceeds

and notify the borrower that the loan(s) has

been paid in full even if we undepay the loan.

[See 34 CFR 685.216 (f )(2)] 

Any payment a borrower makes to the

previous loan holder(s) after the loan(s) is

paid off is forwarded to us as an overpayment.

These payments are applied to the

consolidation loan balance. If our payment

does not satisfy the borrower’s account

balance, the loan holder is prohibited from

billing the borrower and must notify us of the

underpaid amount. We work with the

lender(s) to resolve any underpayment or

overpayment issues.

receive a bill within 60 days of the first

disbursement of the Direct Consolidati

Loan.

NOTE: Borrowers are required to

continue making payments with thei

current lender(s) until they receive

written notification that their loan(s) 

has been successfully consolidated.

NOTE: Borrowers have 180-days, af

the first disbursement of their

consolidation loan, to add a loan(s) t

the consolidation. After 180-days, th

borrowers must complete a new

application listing the existing

consolidation loan and the new loan(
15

REPAYMENT PLANS

Before entering repayment, borrowers receive

information about the four repayment plans

and are asked to select a plan:

❖Standard Repayment Plan: fixed monthly

payments for a maximum of 10 years 

❖Extended Repayment Plan: fixed monthly

payments that are less than payments under

the Standard Plan with the repayment

period ranging from 12 to 30 years

depending on the total amount borrowed

❖Graduated Repayment Plan: monthly

payments that increase every two years with

the repayment period varying from 12 to 30

years depending on the total amount

borrowed

❖Income Contingent Repayment Plan

(ICR): monthly payments that are based on

a borrower’s annual income, family size, and

total Direct Loan debt, and are spread over

a term of up to 25 years

pyp

borrowers of Direct Subsidized and

Unsubsidized Consolidation Loans. Direct

PLUS Loan borrowers may not choose the

ICR Plan.

Borrowers who consolidate more than one

loan type (subsidized, unsubsidized, and

PLUS) will have only one Direct

Consolidation Loan and will make only one

payment each month. In general, borrowers

choose one repayment plan. However,

borrowers who consolidate PLUS Loans with

student loans may repay the PLUS portion

under a different repayment plan.

Borrowers who do not choose a plan are

assigned to the Standard Repayment Plan;

however, borrowers may change plans at any

time.
16

This example shows a Direct Subsidized

Consolidation Loan repaid at an 8.25

percent interest rate under the Standard

Repayment Plan for 10 years (120

payments).

Loan Beginning Total

Amount Monthly Amount

Payment Repaid

$15,000 $184 $22,077*

*$15,000 in principal and $7,077 in interest

Extended Repayment Plan

With the Extended Plan, borrowers make

fixed monthly payments of at least $50 over a

12- to 30-year period, depending on the

borrower’s total education loan debt. (See the

table upper right.) 

Education loans that are not included in the

consolidation may be considered when

calculating the length of repayment under the

Extended Plan; however, they may not exceed

the amount of the Direct Consolidation

Loan. Borrowers with a small loan balance

may repay in less than 12 years.

$60,000 or more 30 years

Because most borrowers take longer tha

years to repay their loans under the Ext

Plan, their monthly payments are lower 

they would be with the Standard Plan.

However, the amount borrowers repay 

greater because they pay more interest. 

Example B below.)

EXAMPLE B

This example shows a Direct Subsidi

Consolidation Loan repaid at an 8.2

percent interest rate under the Exten

Repayment Plan for 15 years (180

payments).

Loan Beginning Tota

Amount Monthly Amou

Payment Repa

$15,000 $146 $26,1

*15,000 in principal and $11,196 in inte
17

calculating the length of repayment under the

Graduated Plan; however, they may not

exceed the amount of the Direct

Consolidation Loan.

This plan works for borrowers who expect

their income to increase steadily over time. A

borrower’s monthly payment will be equal to

either the interest that accumulates on the

borrower’s loans or half of the payment the

borrower would make each month using the

Standard Plan. A borrower’s monthly

payment will never increase more than 1.5

times what the borrower would pay under the

Standard Repayment Plan. Generally,

borrowers repay more over the term of the

loan in the Graduated Plan than in the

Extended Plan. However, the Graduated

Plan offers lower payments when borrowers

are just starting out in their careers. (See

Example C upper right.)

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

*15,000 in principal and $13,762 in interest 
18

To participate in the ICR Plan, borrowers

(and if married, their spouses) must sign the

Income Contingent Repayment Plan Consent

to Disclosure of Tax Information form. This

allows the IRS to release income information

to the Department of Education to calculate

monthly payments. Borrowers’ monthly

payments are adjusted annually to reflect

inflation, income and interest rate changes.

The monthly payment amounts for some

borrowers may not be enough to cover the

interest accruing on their loans. This

situation is referred to as negative

amortization. In such cases, the unpaid

interest is capitalized, added to the principal

balance, annually, not to exceed 10 percent of

the original loan balance. Once the

capitalization limit has been reached, interest

continues to accrue but is not capitalized.

(The capitalization limit does not apply to

interest that accrues during deferment or

forbearance.)

Alternative Documentation of

Income

Alternative documentation of income is

required for borrowers in their first year 

repayment, and for certain borrowers in 

second year of repayment because the

reported AGI may not reflect their curr

income. Such documentation includes p

stubs, canceled checks, or, if these are

unavailable, a signed statement explaini

income sources. Alternative documenta

of income does not apply to borrowers w

new consolidation loans if they have be

repayment on their underlying loans for 

years.

Other borrowers who may be required t

submit alternative documentation of inc

include borrowers whose AGI does not

reasonably reflect their current income. 

addition, borrowers may choose to subm

alternative documentation of current in

if special circumstances, such as loss of

employment, warrant a payment adjustm
19

would be $0 for borrowers with income less

than or equal to the U.S. Department of

Health and Human Services poverty level for

their family size. (See Direct Loan Repayment

Book for more information.) Borrowers whose

calculated monthly payment is greater than $0

but less than $5 are required to make a $5

monthly payment. Other borrowers must pay

the calculated monthly payment.

Because the ICR Plan is designed to keep

payments affordable, it contains calculations

to protect low-income borrowers. Low

income borrowers pay the lesser of:

❖the amount they would pay if they repaid

their loan in 12 years, multiplied by an

income percentage factor that varies with

their annual income, or

❖20 percent of their discretionary income (AGI

minus the poverty level for their family size)

EXAMPLE D

This 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.

Loan Adjusted Beginning Number of Years Total

Amount Gross Income Monthly Payment in Repayment Repayment

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

the borrower’s income. (For income

percentage factors, see the Direct

Loan Repayment book).

89.77% (0.9089) x 164.4315 = $148

Step 3: Determine 20 percent of

discretionary income. (See the

Direct Loan Repayment book for

poverty guidelines chart. We used

the poverty guideline for a family 

size of one.)

($30,000 - $8,050) x 0.20 ÷ 12 = $366

Step 4: Payment is the amount determined

in step 2 because it is less than 20

percent of discretionary income.

*$15,000 in principal and $10,034 in interest
20

(For more information on alternative

documentation of income see page 18.)

The monthly payments for married borrowers

repaying jointly are based on their joint debt

and income. While married borrowers are

not required to repay their loans jointly, it is

important to remember that if only one

spouse chooses to repay under ICR Plan,

the AGI (or alternative documentation of

income) for both spouses will be used to

determine a monthly payment.

(See Example E below.)

Direct Loan Repayment book.

0.0109621 x 15,000 = 164.431

Step 3: Multiply the result by the inco

percentage factor that correspo

the joint income. (For income

percentage factors, see the Dire

Loan Repayment book.)

79.91% (0.7991) x 164.4315 = 

Step 4: Determine 20 percent of

discretionary income. (See the

Direct Loan Repayment book 

poverty guidelines chart. We use 

poverty guideline for a family size 

($25,000 - $10,850) x 0.20 ÷ 12 

Step 5: Payment is the amount determ

step 3 because it is less than 20

percent of

discretionary income.

EXAMPLE E

This example shows a married couple with a family size of two and a $25,000 AGI. T

are jointly repaying a $15,000 Direct Subsidized Consolidation Loan ($10,000 for one

spouse and $5,000 for the other) at an 8.25 percent interest rate under the ICR Plan.

Loan Adjusted Beginning Number of Years Total

Amount Gross Income Monthly Payment in Repayment Repayment

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

*$15,000 in principal and $12,974 in interest
21

ppyp

Borrowers pay off their loan(s) quicker and

pay less interest than under the other plans.

However, the Standard Plan may require

higher monthly payments.

Borrowers who expect to have a good income

benefit from the Standard Plan. Borrowers

who think a higher monthly payment may be

difficult to manage or who are unsure of their

income are better off with another plan.

The Extended and Graduated plans have

longer repayment periods than the Standard

Plan. Thus, borrowers will likely have lower

monthly payments but will pay more interest

over the life of the loan. Payments are fixed

under the Extended Plan, and borrowers

generally pay less interest under the Extended

Plan than under the Graduated Plan.

The Standard and Extended plans offer

borrowers fixed payments. However,

borrowers who prefer to initially make smaller

payments first and larger payments as their

income increase may benefit from the

Graduated Plan.

Borrowers who select the ICR Plan have

monthly payments that vary with their annual

income. Borrowers with low incomes will

have longer repayment periods than they

would have under another plan. As a result,

borrowers pay more in interest, but should

have an easier time keeping up with monthly

payments allowing them to avoid default.

CHANGING PLANS

Most borrowers may change repayment plans

at any time. Borrowers who were required to

repay under the ICR plan must make three

consecutive monthly payments before

switching to another plan. There is no limit

to the number of times borrowers may change

plans.

❖A borrower may change to the ICR plan at

any time. After the switch, the borrower’s

repayment period will be 25 years, less any

time spent in the ICR, Standard, and 12-

year Extended plans. Time spent in the

Extended Plan under the 15- to 30-year

periods and in the Graduated Plan does not

count toward the 25-year maximum.

❖A borrower may change to another plan as

long as the new plan has a repayment term

longer than the amount of time the

borrower has already spent in repayment.

For example, a borrower in the Extended

Plan may only change to the Standard Plan

if the borrower has spent fewer than 10

years in repayment. The new repayment

term will be determined by subtracting the

amount of time a borrower has spent in

repayment from the term allowed under the

new plan. For example, a borrower who has

spent three years in the Extended Plan

would have a new seven-year repayment

period under the Standard Plan.
22

g

period equal to the number of months of

grace remaining when the first disbursement

is made.) 

Borrowers will receive a monthly billing

statement from the Direct Loan Servicing

Center, unless the borrower is repaying the

Direct Consolidation Loan using Electronic

Debit Account (EDA).

Borrowers who choose to repay using EDA

will receive a .25 percent discount on their

interest rate for as long as they continue to

make payments this way.

otherwise. The borrower will be notifie

revised due date.

Borrowers must keep the Direct Loan

Servicing Center informed of any name 

address changes. Borrowers are respon

for making payments on time regardles

whether they receive billing statements.

Borrowers should send payments to:

U.S. Department of Education

Direct Loan Payment Center

P.O. Box 530260

Atlanta, GA 30353-0260
23

temporarily postpone payments on their loan.

The federal government pays the interest

charged on subsidized consolidation loans

during a deferment, but the borrower is

responsible for interest charged on

unsubsidized and PLUS consolidation loans.

The borrower may either pay the interest as it

accrues or allow it to accumulate and

capitalize when the deferment period ends.

For borrowers whose consolidation loan

contains subsidized, as well as unsubsidized

and PLUS portions, interest is charged only

on the unsubsidized and PLUS portions

during periods of deferment.

NOTE: The length of a repayment

period does not include periods of

deferment.

Deferments are available for Direct

Consolidation Loan borrowers who meet at

least one of the following conditions:

❖The borrower is enrolled at least half-time

at an eligible school. There is no maximum

eligibility limit for this deferment.

(Borrowers participating in a medical

internship or residency – except for a

dentistry residency – are not eligible for this

deferment. For information on forbearance,

see page 25.)

gy 

deferment.

❖The borrower is enrolled full time in a

rehabilitation training program that is

approved by the Department of Education.

There is no maximum eligibility limit for

this deferment.

❖The borrower is unemployed and seeking

but unable to find full-time employment.

Eligibility for this deferment is limited to

three years.

❖The borrower is experiencing or will

experience an economic hardship. Criteria

for this deferment include receiving

payment under a public assistance program

or earning a salary below the poverty line.

Contact the Direct Loan Servicing Center

for more information or see 34 CFR

685.204(b)(3) and 34 CFR 682.210(s)(6).

Borrowers who had an outstanding balance on

a Federal Family Education Loan Program

(FFEL) made before July 1, 1993, at the time

they obtained their Direct Consolidation

Loan may be eligible for additional

deferments under the following conditions:

❖The borrower is serving in an eligible

internship or residency program. Eligibility

for this deferment is limited to two years.
24

❖The borrower is serving in the U.S. Armed

Forces, Peace Corps, or the Commissioned

Corps of the Public Health Service, or

serving as a full-time paid volunteer for a

tax-exempt organization or an ACTION

program. Under certain circumstances,

members of the reserve component of the

National Guard or the U.S. Armed Forces

who are on active duty may also qualify for

this deferment. Eligibility for this

deferment is limited to three years.

❖The borrower is serving on active duty in

the National Oceanic and Atmospheric

Administration. Eligibility for this

deferment is limited to three years, and

Direct PLUS Consolidation Loan

borrowers are ineligible.

❖The borrower is pregnant, caring for a

newborn child, or caring for a newly

adopted child. The borrower must not be

working full time or attending school, but

must have attended at least half time within

the six months preceding application for

this deferment. Eligibility for this

deferment is limited to six months per

occurrence, and Direct PLUS Consolidation

Loan borrowers are ineligible.

balance on a FFEL made before July 1, 

at the time they obtained the Direct

Consolidation Loan, may be eligible to

receive an Education Related Defermen

the dependent student for whom they

received the loans meets at least one of 

following conditions:

❖The student is enrolled at least half-ti

an eligible school.

❖The student is enrolled full time in an

approved graduate fellowship program

❖The student is enrolled full time in an

approved rehabilitation training progr

NOTE: Married borrowers are eligib

for a deferment on a joint consolidat

loan only if both spouses are eligible 

a deferment; however, they do not ha

to meet the requirements for the sam

deferment.

NOTE: Endorsers on Direct PLUS

Consolidation Loans are not eligible 

deferments.
25

underlying loans and gain the

deferments available on a Direct

Consolidation Loan when they

consolidate. Borrowers should weigh

carefully the advantages and

disadvantages when deciding whether or

not to consolidate.

FORBEARANCE

Borrowers who are willing but unable to make

payments and do not qualify for a deferment

may be eligible for forbearance. Forbearance

means temporarily postponing payments or

making smaller payments for a limited and

specified period of time. Interest is charged

on all Direct Consolidation Loans during

forbearance. While both principal and

interest payments are forborne, borrowers may

choose to pay the interest as it accumulates or

have it capitalized at the end of the

forbearance period.

NOTE: Endorsers on Direct PLUS

Consolidation Loans may be eligible for

forbearance.

❖The borrower is serving in a medical or

dental internship or residency.

❖The borrower is serving in a position under

the National and Community Service Trust

Act of 1993.

❖The borrower is obligated to make

payments on Title IV loans that are equal to

or greater than 20 percent of the borrower’s

total monthly gross income. Eligibility is

limited to three years.

NOTE: Married borrowers are eligible

for forbearance on a joint consolidation

loan only if both spouses meet the

requirements for forbearance.

Borrowers who meet any of these conditions

and want to postpone repayment of their loan

must call or write the Direct Loan Servicing

Center to obtain the appropriate form.

Borrowers must document that they meet the

requirements for forbearance.

NOTE: Forbearances are granted for

periods of up to one year at a time.
26

ON A DIRECT

CONSOLIDATION LOAN

The consequences of default are severe and

long-lasting:

❖ The Department of Education can

immediately demand repayment of the total

loan amount due.

❖ The Department of Education will attempt

to collect the debt and may charge the

borrower collection costs.

❖ The default will be reported to national

credit bureaus, and the borrower’ credit

rating will be damaged, making it difficult

for the borrower to make purchases such as

a car or house.

❖ Borrowers in default are ineligible for Title

IV student aid.

❖ Borrowers in default are ineligible for

deferments.

❖ The Internal Revenue Service can withhold

a borrower’s federal income tax refund.

❖ The borrower’s wages may be garnished.

Default can occur when a borrower fails 

keep the Direct Loan Servicing Center 

date on address or name changes and b

statements go astray. The Direct Loan

Servicing Center can offer alternatives w

borrower is having trouble making mon

payments. Borrowers may apply for a

deferment or forbearance, or change

repayment plans.
27

ON A DIRECT

CONSOLIDATION LOAN

A borrower’s loan may be discharged with

proof of the following:

❖ The borrower becomes totally and

permanently disabled. A physician must

certify total and permanent disability. Also,

the condition cannot have existed at the

time the borrower applied for the Direct

Consolidation Loan, unless a doctor

certifies that the condition substantially

deteriorated after the loan was made.

NOTE: A borrower is considered totally

and permanently disabled if he/she

would be considered permanently

disabled for all loans that were included

in the consolidation loan if those loans

had not been consolidated.

Sec.685.212(b)(3)(i).) 

❖ The borrower dies. However, borrowers

who consolidate jointly agree to repay the

entire consolidation loan if either spouse

dies.

❖ The borrower has not received a refund

that should have been made by the school.

parent has a PLUS Loan for the borrower,

it will also be discharged.

❖ The borrower’s obligation to repay a loan is

discharged in bankruptcy (in rare cases).

NOTE: Married borrowers who

consolidate jointly are eligible for

discharge only if both meet the

requirements for discharge, with the

exception of a discharge for a closed

school or false certification of eligibility.

Borrowers may not avoid repaying their loans

because they did not complete a course of

study (for reasons other than school closure or

false certification), did not like a school or

program, or did not obtain employment after

completing school.

NOTE: Borrowers who have Federal

Perkins Loans are eligible for

cancellation under other conditions,

such as performing certain kinds of

public service. This benefit is lost when

a Perkins Loan is included in a Direct

Consolidation Loan.
28

HEALTH PROFESSIONS

STUDENT LOANS (HPSL) &

LOANS FOR DISADVANTAGED

STUDENTS (LDS)

❖HPSL and LDS borrowers receive a oneyear grace period. Direct Consolidation

Loans that include a HPSL or LDS do not

qualify for a grace period.

❖To qualify for an in-school deferment,

Direct Consolidation Loan borrowers must

be attending at least half-time. HPSL and

LDS borrowers are required to attend

school full time to be eligible for an inschool deferment.

❖For HPSL and LDS borrowers, the interest

rate is fixed at 3, 5, 7, or 9 percent –

depending on the date the loan was made.

The interest rate on a Direct Consolidation

Loan is based on the weighted average of

the interest rates on the loans being

consolidated. It is a fixed rate with an 8.25

percent cap.

❖Interest does not accrue on HPSL or 

loans during periods of grace and

deferment. However, borrowers who

include a HPSL or LDS in a Direct

Consolidation Loan are charged inter

during these periods. They may eithe

the interest as it accumulates or allow 

capitalize.

❖HPSL and LDS borrowers have 10 y

repay their loans. Direct Consolidatio

Loan borrowers may choose from fou

repayment plans with 10 to 30 years t

repay their loans depending on the

repayment plan and how much they o

Borrowers who include a HPSL or LD

Direct Consolidation Loan do not retai

deferments that apply to the health

professions loan. However, they gain th

deferments that apply to Direct Consol

Loans. They may be eligible for additio

deferments if they have an outstanding

balance on an FFEL made before July 1

1993, when they obtain a Direct

Consolidation Loan. (For more inform

on deferments, see Postponing Repaym

page 23.)
29

HEALTH EDUCATION

ASSISTANCE LOANS (HEAL) 

❖HEAL borrowers receive a nine-month

grace period. Direct Consolidation Loans

that include a HEAL do not qualify for a

grace period.

❖To qualify for an in-school deferment,

Direct ConsolidationLoan borrowers must

be attending an eligible school at least

half-time. HEAL borrowers are required to

attend school full time to be eligible for an

in-school deferment.

❖HEALs may be offered as fixed or variable

rate loans. The maximum interest rate on a

variable rate HEAL is based on the average

91-day Treasury bill rate plus 3 percentage

points and is not capped. This rate is

adjusted quarterly.

❖Actual HEAL interest rates are frequently

much lower than the maximum. For

example, in Fiscal Year 1996 interest rates

were as low as the quarterly Treasury bill

rate plus 1.59 percentage points.

❖Some HEALs may be offered as fixed

interest rate loans. The interest rate cannot

exceed the maximum interest rate assessed

for the quarter in which the borrower

obtains the HEAL.

❖Under the Direct Consolidation Loan

Program, HEAL borrowers may repay

under the ICR Plan for the entire

repayment period. HEAL lenders are only

required to offer an ICR Plan for the first

five years of repayment.

HEAL REFINANCING

❖Borrowers who have defaulted on a HEAL

may include the collection costs and late

fees in a Direct Consolidation Loan. These

fees can not be included under HEAL

Refinancing.

❖Borrowers who include a HEAL in a Direct

Consolidation Loan do not retain the

deferments that apply to the HEAL, as

they would under HEAL Refinancing.

However, they gain the deferments that

apply to Direct Consolidation Loans. They

may be eligible for additional deferments if

they have an outstanding balance on an

FFEL made before July 1, 1993, when they

obtain a Direct Consolidation Loan. (For

more on deferments, see Postponing

repayment page 23.)
30

LOANS (NSL)

❖NSL borrowers receive a nine-month grace

period. Direct Consolidation Loans that

include a NSL do not qualify for a grace

period.

❖For NSL borrowers, the interest rate is fixed

at 3, 5, or 6 percent – depending on the

date the loan was made. The interest rate

on a Direct Consolidation Loan that

includes an NSL is based on the weighted

average of the loans being consolidated. It

is a fixed rate with an 8.25 percent cap.

❖Interest is not charged on NSLs during

periods of grace and deferment. However,

borrowers who include a NSL in a Direct

Consolidation Loan are charged interest

during these periods. They may either pay

the interest as it accumulates or allow it to

capitalize.

may be eligible for additional deferme

they have an outstanding balance on a

FFEL made before July 1, 1993, when 

obtain a Direct Consolidation Loan. 

more on deferments, see Postponing

Repayment page 23.)

NOTE: NSL borrowers may be eligi

for either a Federal Consolidation Lo

or a Direct Consolidation Loan. In

either case, the terms applying to the

new consolidation loan override som

the limits on the underlying loans. T

repayment period starts over, and

borrowers may apply for deferments 

which the time limit had been

exhausted.
31

474 South Court Street

Suite 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 consolidation

• Estimated repayment information

• Applications

• Replacement forms

• Questions about application processing

• Working hours from 8 a.m. to 8 p.m. (EST) Monday-Friday

Mail applications, correspondence, repayment plan selection forms, disclosure of tax

information (ICR) and alternate documentation of income (ADI) to:

William D. Ford Direct Loan Program

P. O. Box 242800

Louisville, KY 40224

Mail verification certificates, promissory notes and endorser addenda to:

William D. Ford Direct Loan Program

P.O. Box 2007

Montgomery, AL 36102-2007
32

Utica, NY 13504-4609

• Mail payments to:

U.S. Department of Education

Direct Loan Payment Center

P.O. Box 530260

Atlanta, GA 30353-0260

Telephone numbers and information are subject to change without notice
33

❖Federal Direct Consolidation Loan Application and Promissory Note Package includes a 12-page

information booklet on Direct Consolidation Loans, an Application and Promissory note,

Instructions for completing the Application and Promissory Note, an Additional Loan Listing

sheet, 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 address

is http://www.loanconsolidation.ed.gov.
34

education loan during the five years preceding

the credit report.

Capitalization:

The addition of accrued interest to the

principal of a loan, increasing the cost of the

loan.

Constant Multiplier:

A factor used to calculate payments at a given

interest rate over a fixed period of time.

Default:

Failure to repay a loan according to the terms

of the promissory note. This failure must

persist for 270 days.

Deferment:

A temporary postponement of payments on a

loan.

Discretionary Income:

A borrower’s federal Adjusted Gross Income

(AGI) minus the U.S. Department of Health

and Human Services poverty

Level for the borrower’s family size.

In-School Period:

A student loan is considered to be in an 

in-school period if it is not in grace or

repayment.

Reasonable and Affordable Payments:

The holder of a Direct Loan or FFEL

Program loan determines what constitu

reasonable and affordable payment on a 

by-case basis. Loan holders consider

disposable income and such expenses as

housing, utilities, food, medical costs, w

related expenses, dependent care, and ot

Title IV education loans. Borrowers ar

provided with a written statement of th

payment and an opportunity to object t

those terms.

Rehabilitation:

The process of bringing a loan out of d

and removing the default notation on a

borrower’s credit report. To rehabilitate 

defaulted Direct Loan or Perkins Loan

borrower must make 12 consecutive,

voluntary, on-time, full monthly payme

that are reasonable and affordable given 

borrower’s total financial situation on th

defaulted loan. To rehabilitate a FFEL

borrower must make 12 consecutive,

voluntary, on-time, full monthly payme

that are reasonable and affordable given 

borrower’s total financial situation on th

defaulted loan, and the loan must be res
35

given the borrower’s total financial situation

constitute satisfactory repayment

arrangements. (Borrowers who are in default

on other federal education loans must contact

their current loan holders to determine how

those loan holders define satisfactory

repayment arrangements.)
36

➢ 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: U.S. Department of Education

Consolidation Work Group

ROB-3, Room 5626

7th and D Streets, SW

Washington, DC 20202-5404

Fax number: (202) 205-8072

Thank you for partnering with us!
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