Consolidation Loan Provisions in the Federal Family Education Loan and Direct Loan Programs

Consolidation Loan Provisions in the Federal Family Education Loan and Direct Loan Programs

Order Code RL31575
CRS Report for Congress
Received through the CRS Web
Consolidation Loan Provisions in the
Federal Family Education Loan
and Direct Loan Programs
Updated November 16, 2004
Adam Stoll
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Consolidation Loan Provisions in the
Federal Family Education Loan
and Direct Loan Programs
Summary
The federal government operates two major student loan programs: the Federal
Family Education Loan (FFEL) program, authorized by Part B of Title IV of the
Higher Education Act (HEA), and the William D. Ford Direct Loan (DL) program,
authorized by Part D of Title IV of the HEA. These programs provide loans to
undergraduate and graduate students and the parents of undergraduate students to
help them meet the costs of postsecondary education.
Under the FFEL program, loan capital is provided by private lenders, and the
federal government guarantees lenders against loss through borrower default, death,
permanent disability, or, in limited instances, bankruptcy. Under the DL program,
the federal government provides the loans to students and their families, using federal
capital (i.e., funds from the U.S. Treasury). The two programs rely on different
sources of capital and different administrative structures, but essentially disburse the
same set of loans: subsidized and unsubsidized Stafford loans for undergraduate and
graduate students; PLUS loans for undergraduate students; and consolidation loans,
which provide refinancing opportunities.
Combined annual consolidation loan volume for the FFEL and DL programs has
grown dramatically in recent years, going from approximately $5.8 billion in FY1998
to approximately $41.6 billion in FY2003. As consolidation loan volume has grown,
Congressional interest in the consolidation loan benefit has also grown.
Consolidation loans received considerable attention during the 1998 reauthorization
of the HEA and have subsequently been the focus of numerous legislative proposals.
In general, proposals have dealt with promoting comparability in the consolidation
loans available within the FFEL and DL programs, and addressing perceived
competitive advantages that may have enhanced either loan program’s ability to
attract consolidation loan borrowers.
A complex set of provisions has been enacted to regulate competition for
refinance business among loan holders within the FFEL program and across the DL
and FFEL programs, and to protect borrowers — attempting to ensure they are
afforded equitable refinancing options. While terms and conditions for FFEL and DL
consolidation loans have become more similar in recent years, they still differ in
many ways.
This report will be updated as warranted.

Contents
About This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidation Loan Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
List of Tables
Table 1. Comparison of Borrower Consolidation Loan Provisions in the
FFEL and DL Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Consolidation Loan Provisions in the
Federal Family Education Loan
and Direct Loan Programs
About This Report
This report provides comprehensive descriptive information on major provisions
of the law pertaining to the consolidation loans available to federal student loan
borrowers through the FFEL and DL programs. Specifically, the report summarizes
the provisions of the law pertaining to each program’s borrower eligibility
requirements, underlying loan eligibility requirements, interest rates, authorized
discounts, repayment terms, and requirements regulating borrower choice among
consolidators. The report deals exclusively with provisions applicable to
consolidation loans that are currently being disbursed. It will be updated as program
changes are adopted, provided that it continues to be useful to provide comparative
information on the consolidation loan provisions in each program.
Background
The federal government operates two major student loan programs: the Federal
Family Education Loan (FFEL) program, authorized by Part B of Title IV of the
Higher Education Act (HEA), and the William D. Ford Direct Loan (DL) program,
authorized by Part D of Title IV of the HEA. These programs provide loans to
undergraduate and graduate students and the parents of undergraduate students to
help them meet the costs of postsecondary education.
Under the FFEL program, loan capital is provided by private lenders, and the
federal government guarantees lenders against loss through borrower default, death,
permanent disability, or, in limited instances, bankruptcy. Under the DL program,
operated through the U.S. Department of Education (ED), the federal government
provides the loans to students and their families, using federal capital (i.e., funds
from the U.S. Treasury). The two programs rely on different sources of capital and
different administrative structures, but essentially disburse the same set of loans.1
The DL program, established in 1993, was intended to streamline the student
loan delivery system and achieve cost savings. While the DL program was originally
1 For detailed information on the array of FFEL and DL program loans, see CRS Report
RL30655, Federal Student Loans: Terms and Conditions for Borrowers, by Adam Stoll.
For a thorough discussion of how the loan programs operate, see CRS Report RL30656, The
Administration of Federal Student Loan Programs: Background and Provisions, by Adam
Stoll.

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introduced to gradually expand and replace the long-standing FFEL program, the
1998 HEA amendments removed the provisions of the law that referred to a “phase
in” of the DL program. Currently both programs are authorized and the two programs
compete for student loan business.
The FFEL and DL programs provide the following types of loans to students and
their parents:
Stafford loans (subsidized2 and unsubsidized): Low interest, variable rate loans
available to undergraduate and graduate students. The interest rates on these loans
adjust annually, based on a statutorily established market-indexed rate setting
formula, and may not exceed 8.25%.
PLUS loans: Variable rate loans available to parents of dependent undergraduate
students. The interest rates on these loans adjust annually, based on a statutorily
established market-indexed rate setting formula, and may not exceed 9%.
Consolidation loans: Loans that provide borrowers with refinancing options.
Consolidation loans enable borrowers to simplify the repayment of loans by
combining multiple loans into one. Consolidation loans also enable borrowers to
lower monthly payments by extending the repayment period. Additionally,
consolidation loans afford borrowers the opportunity to lock in a fixed interest rate
on their student loans, based on the weighted average of the interest rates in effect on
the loans being consolidated rounded up to the nearest one-eighth of 1%, capped at
8.25%.
Consolidation Loan Issues
Combined annual consolidation loan volume for the FFEL and DL programs has
grown dramatically in recent years, going from approximately $5.8 billion in FY1998
to approximately $41.6 billion in FY2003. As consolidation loan volume has grown,
congressional interest in the consolidation loan benefit has also grown.
Consolidation loans received considerable attention during the 1998 reauthorization
of the HEA and have subsequently been the focus of numerous legislative proposals.
In general, proposals have dealt with promoting comparability in the consolidation
loans available within the FFEL and DL programs, and addressing perceived
competitive advantages that may have enhanced either loan program’s ability to
attract consolidation loan borrowers.
A complex set of provisions has been enacted to regulate competition for
refinance business among loan holders within the FFEL program and across the DL
and FFEL programs; and to protect borrowers — attempting to ensure they are
afforded equitable refinancing options. While terms and conditions for FFEL and DL
consolidation loans have become more similar in recent years, they are still not
identical. Important differences remain in the programs’ loan discounting benefits,
2 To qualify for a “subsidized” Stafford loan a student must establish financial need. The
federal government pays the interest on the subsidized Stafford loans while the student is
in school (on at least a half-time basis) and during grace periods and deferment periods.

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repayment plans, borrower choice (among consolidator) provisions, and in other
areas.
This report provides descriptive information on several key features of the
consolidation loans that have been central to the recent policy discourse surrounding
consolidation loans. It should be noted that existing statutory and regulatory
provisions pertaining to consolidation loans are widely considered to be under-
specified in certain areas. In some of these areas, statutory and regulatory intent is
interpreted in varying ways by participants in the loan programs. Where some debate
exists about interpretation of statutory or regulatory intent, an effort is made in the
text that follows to identify competing interpretations. To facilitate easy comparisons
between consolidation loan provisions in each loan program, the information
presented in the remainder of this report is displayed in a side by side comparative
format in Table 1, below.3
Table 1. Comparison of Borrower Consolidation Loan
Provisions in the FFEL and DL Programs
Borrower
provisions
FFEL program
DL program
Borrower
Borrower eligibility for a FFEL
Borrower eligibility for a DL
eligibility for
consolidation loan: A borrower is
consolidation loan: A borrower is
consolidation
eligible for a FFEL program
eligible for a DL program
loans
consolidation loan if the borrower has
consolidation loan if the borrower has
at least one outstanding FFEL or DL
at least one outstanding DL or FFEL
loan that is eligible for inclusion in a
loan that is eligible for inclusion in a
FFEL consolidation loan,a and the
DL consolidation loan, and the
borrower:
borrower:
— Has entered the grace or
— Is seeking to consolidate loans that
repayment period on each loan he or
have been fully disbursed.
she is seeking to consolidate.b
— H a s ma d e r e p a yme n t
— Has made repayment arrangements
arrangements that are satisfactory to
that are satisfactory to the loan
the loan guarantor or Secretary of
guarantor or Secretary of Education on
Education on any loan the borrower
any loan the borrower seeks to
seeks to consolidate that is in default.c
consolidate that is in default.c
— Does not have another
— Does not have another
consolidation application pending, and
consolidation application pending, and
agrees to notify the consolidation loan
agrees to notify the consolidation loan
holder of address changes.
holder of address changes.
3 Statutory provisions pertaining to FFEL and DL consolidation loans can be found in
Section 428C and Section 455 of the HEA, respectively. FFEL consolidation loan
regulatory provisions can be found in 34 CFR 682 Sections 100-103 and 200-211. DL
consolidation loan regulatory provisions can be found in 34 CFR Section 685.220.

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Borrower
provisions
FFEL program
DL program
— Does not have an adverse credit
history if the borrower seeks to
consolidate PLUS loans.d
Borrower eligibility for a FFEL joint
Borrower eligibility for a DL joint
consolidation loan: Married persons,
consolidation loan: Married persons,
each of whom has eligible loans, are
each of whom has eligible loans, are
eligible for a single consolidation loan.
eligible for a single consolidation loan.
Only one of the borrowers must meet
Only one of the borrowers must meet
the full set of individual eligibility
the full set of individual eligibility
requirements. However, each agrees to
requirements. However, each agrees
become jointly and severally liable for
to become jointly and severally liable
repayment of the note.e
for repayment of the note.e
Loans eligible
Eligible loans: As is noted above, a
Eligible loans: As is noted above, a
for
FFEL consolidation loan must be
DL consolidation loan must be
consolidation
comprised of at least one eligible
comprised of at least one eligible DL
FFEL or DL loan. In addition, it may
or FFEL loan. In addition, it may
contain other eligible loans. All loans
contain other eligible loans. All loans
eligible for inclusion in a FFEL
eligible for inclusion in a DL
Consolidation loan are listed below:
Consolidation loan are listed below:
— FFEL Stafford loans (subsidized
— DL Stafford loans (subsidized and
and unsubsidized)
unsubsidized)
— FFEL PLUS loans
— DL PLUS loans
— FFEL Consolidation loans (only
— DL Consolidation loans
when combined with new loans)f
— DL Stafford loans (subsidized and
— FFEL Stafford loans (subsidized
unsubsidized)
and unsubsidized)
— DL PLUS loans
— FFEL PLUS loans
— DL Consolidation loans (only
— FFEL Consolidation loans
when combined with new loans)f
— Federal Perkins loans
— Federal Perkins loans
— National Direct Student Loans
— National Direct Student Loans
(NDSL)
(NDSL)
— Supplemental Loans for Students
— Supplemental Loans for Students
(SLS)g
(SLS)g
— Auxiliary Loans to Assist Students
— Auxiliary Loans to Assist Students
(ALAS)g
(ALAS)g
— Federal PLUS loansg
— Federal PLUS loansg
— Guaranteed Student Loans (GSL)g
— Guaranteed Student Loans (GSL)g
— Federal Insured Student Loans
— Federal Insured Student Loans
(FISL)
(FISL)

CRS-5
Borrower
provisions
FFEL program
DL program
— National Defense Student Loans
— National Defense Student Loans
(NDSL)
(NDSL)
— Health Professional Student Loans
— Health Professional Student Loans
(HPSLs)
(HPSLs)
— Loans for Disadvantaged Students
— Loans for Disadvantaged Students
(LDS)
(LDS)
— Health Education Assistance
— Health Education Assistance
Loans (HEALs)
Loans (HEALs)
— Public Health Service Act Nursing
— Public Health Service Act Nursing
Student Loans (NSLs)
Student Loans (NSLs)
Interest rates
Consolidation loan interest rates:
Consolidation loan interest rates: ED
and
Lenders in the FFEL program may not
may not charge borrowers interest
authorized
charge borrowers interest rates that
rates that exceed the statutory
discounts
exceed the statutory maximum rate.
maximum rate. The statutory
The statutory maximum rate is a fixed
maximum rate is a fixed rate equal to
rate equal to the weighted average of
the weighted average of the interest
the interest rates on the loans
rates on the loans consolidated
consolidated rounded up to the nearest
rounded up to the nearest one-eighth
one-eighth of 1%; capped at 8.25%.
of 1%; capped at 8.25%.
Consolidation loan interest rate
Consolidation loan interest rate
discounts: Lenders are free to offer
discounts: ED may offer borrowers
borrowers interest rates that are lower
interest rate reductions to encourage
than the statutory maximum rates.
on-time repayment provided that the
They are also free to offer repayment
reductions are cost-neutral to the
incentives.
federal government.
Grace period consolidation rates:
In-school and grace period
Borrowers with Stafford loans who
consolidation rates: Borrowers with
consolidate through the FFEL program
Stafford loans who consolidate
during their grace period are able to
through the DL program while in
utilize their grace period Stafford
school or during their grace period are
interest rates in the “weighted
able to utilize their in-school/grace
average” calculations that determine
period Stafford interest rates in the
the fixed interest rate for the life of
“weighted average” calculations that
their consolidation loans. This
determine the fixed interest rate for the
amounts to a discount because the
life of their consolidation loans. This
grace period interest rate is .60
amounts to a discount because the in
percentage points lower than the in
school grace period interest rate is .60
repayment rate.
percentage points lower than the in
repayment rate.
Consolidation of discounted loans:
Consolidation of discounted loans:
When borrowers seek to consolidate
When borrowers seek to consolidate
loans that have been discounted,
loans that have been discounted, ED
lenders may be authorized to utilize
may be authorized to utilize the
the discounted interest rates on these
discounted interest rates on these loans
loans in the “weighted average”
in the “weighted average” calculations
calculations that determine the
that determine the borrowers’ fixed
borrowers’ fixed interest rate for their
interest rate for their DL consolidation
FFEL consolidation loans.h
loans.i

CRS-6
Borrower
provisions
FFEL program
DL program
Repayment
Repayment options: FFEL lenders are
Repayment options: The DL program
terms
authorized to offer consolidation loan
is required to allow borrowers to
borrowers standard, graduated,
choose among standard, graduated,
income sensitive, and extended
extended and income contingent
repayment plans.j Within certain
repayment plans (except that income
boundaries, lenders are authorized to
contingent repayment is not available
craft repayment plans they feel will be
for consolidation loans comprised of
attractive to borrowers.k
underlying PLUS loans). Within
certain boundaries, ED is authorized
to craft repayment plans that will be
attractive to borrowers.l
Repayment period: The consolidation
Repayment period: The consolidation
loan repayment schedule for FFEL
loan repayment period varies by
consolidation loans is determined by
repayment plan. Standard repayment
the consolidation loan balance plus the
must occur within 10 years. Income
outstanding balance of any other
contingent repayment occurs over a
student loans held by the borrower.m
period of up to 25 years. For
The schedule is as follows:
graduated or extended repayment the
schedule is determined by the size of
Amount Maximum term
the consolidation loan balance plus the
(years)
outstanding balance of any other
Less than $7,500.........................10
student loans held by the borrower.m
$7,500 but less than $10,000......12
The schedule is as follows:
$10,000 but less than $20,000....15
$20,000 but less than $40,000....20
Amount Maximum term
$40,000 but less than $60,000....25
(years)
$60,000 and over....................... 30
Less than $10,000.......................12
$10,000 but less than $20,000....15
$20,000 but less than $40,000....20
$40,000 but less than $60,000....25
$60,000 and over....................... 30
Prepayment: There is no penalty for
Prepayment: There is no penalty for
prepayment of loans. Borrowers may
prepayment of loans. Borrowers may
pay off their loans ahead of schedule
pay off their loans ahead of schedule
and cannot be assessed charges for
and cannot be assessed charges for
doing so.
doing so.
Borrower
Borrower options: A variety of
Borrower options: A variety of
choice of
factors determine whether a borrower
factors determine whether a borrower
consolidator
is able to consolidate within the FFEL
is able to select the DL program as its
program and select among FFEL
consolidator. Most of these factors
consolidation lenders. Most of these
pertain to who holds the borrower’s
factors pertain to who holds the
underlying loans. The factors that
borrower’s underlying loans. The
affect borrower eligibility for DL
factors that affect FFEL consolidation
consolidation loans are discussed
options are discussed below.
below.
Single lender FFEL borrowers.
Borrowers with DL loans: Borrowers
B o rrower s seeking a FFEL
seeking a DL consolidation loan
consolidation loan, whose underlying
comprised exclusively of underlying
FFEL loans are held by a single
DL loans may pursue consolidation
holder, are required to first attempt to
within the DL program.
consolidate their loans with that

CRS-7
Borrower
provisions
FFEL program
DL program
holder. If a consolidation loan is
unavailable from the lender that holds
the borrower’s loans or the lender does
not provide the borrower with an
income sensitive repayment plan
acceptable to the borrower, then the
borrower may pursue a FFEL
consolidation loan from any other
FFEL lender offering consolidation
loans.
FFEL borrowers with multiple
lenders: Borrowers whose underlying
FFEL loans are held by multiple
lenders, may pursue a consolidation
loan through any FFEL lender offering
consolidation loans.
Borrowers with FFEL and DL loans:
Borrowers with DL and FFEL loans:
Borrowers seeking to consolidate
Borrowers seeking a DL consolidation
underlying FFEL and DL loans in a
loan comprised of underlying DL and
FFEL consolidation loan may pursue
FFEL loans may pursue consolidation
consolidation through FFEL lenders.
within the DL program. Such
Their ability to choose among FFEL
borrowers are eligible for in-school
consolidators is affected by their status
consolidation through the DL program
as FFEL borrowers (i.e., they are
even if their in-school status is at a
bound by the single/multiple lender
FFEL school.
provisions discussed above).
Borrowers with DL loans: Borrowers
Borrowers with FFEL loans:
seeking a FFEL consolidation loan
Borrowers with no underlying DL
that is comprised exclusively of
loans may pursue a DL consolidation
underlying DL loans may pursue a
loan consisting of underlying FFEL
consolidation loan through any FFEL
loans if the borrower certifies that:
lender.a
they have been unable to obtain a
consolidation loan from a FFEL
lender; or they are unable to obtain a
consolidation loan with an income
sensitive repayment plan acceptable to
the borrower (provided the borrower is
eligible for income contingent
repayment).n A borrower with
outstanding FFEL loans and no DL
loans is eligible for in school
consolidation if the borrower is “in-
school” at a school participating in the
DL program.

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a. There has been some debate as to whether FFEL lenders are authorized to make consolidation loans
consisting exclusively of underlying DL loans. There has also been debate about whether this
issue is addressed directly in statutory or regulatory provisions. In practice, FFEL lenders
commonly make consolidation loans consisting exclusively of underlying DL loans.
b. A grace period is a six-month period beginning immediately after a student ceases to be enrolled
in school on at least a half-time basis. During the grace period, borrowers are not required to
begin repaying their loans.
c. Making “satisfactory repayment arrangements,” for a borrower with a defaulted FFEL or DL loan,
means the defaulted borrower has made at least three voluntary on-time consecutive payments.
Alternatively, a defaulted borrower may incorporate defaulted loans in a consolidation loan if
they agree to repay the consolidation loan under the income sensitive repayment plan (in the
FFEL program) or the income contingent repayment plan (in the DL program). It should be
noted, however, that any defaulted borrower against whom a court has issued a judgement or
against whom a wage garnishment order has been issued is ineligible for FFEL consolidation
loans. Such borrowers may be eligible for consolidation in the DL program with the Secretary’s
approval.
d. If the borrower has an adverse credit history, the borrower must obtain an endorser for the
consolidation loan or provide documentation satisfactory to the Secretary of Education of
extenuating circumstances.
e. Essentially, each borrower must meet the basic borrower eligibility requirements pertaining to their
repayment, default and delinquency status on outstanding loans, however, only one borrower
must meet the full set of loan eligibility requirements.
f. Existing consolidation loans can only be included as an underlying loan in a new FFEL
consolidation loan if combined with other eligible loans that have not previously been
consolidated.
g. Loans disbursed under the Guaranteed Student Loan program (formerly the name of the FFEL
program). For the purposes of loan consolidation these loans count as FFEL program loans.
h. There is some debate as to whether FFEL lenders are authorized to utilize discounted interest rates
on underlying loans as the basis for calculating borrowers’ fixed interest rates for their
consolidation loans. It is not clear that this issue is specifically addressed in statutory or
regulatory provisions. Some lenders appear to believe they are authorized to calculate
consolidation loan interest rates in this manner, and there is some indication that some lenders
are doing so.
i. There is some debate as to whether ED is authorized to utilize discounted interest rates on
underlying loans as the basis for calculating borrowers’ fixed interest rates for their
consolidation loans. It is not clear that this issue is specifically addressed in statutory or
regulatory provisions. It appears that ED calculates consolidation loan interest rates in this
manner when discounted DL loans are being incorporated in a DL consolidation loan. It is not
clear, however, that the discounted rates on underlying FFEL loans (being incorporated in a DL
consolidation loan) are being used in determining fixed interest rates for consolidation loans.
j. In general, statutory and regulatory provisions are interpreted as requiring lenders to offer
borrowers each repayment plan. Some lenders feel statutory and regulatory intent is under-
specified in this area and that lenders are required to offer either a graduated or income sensitive
repayment plan, not both.
k. The following statutorily established provisions place some constraints on lenders’ flexibility in
designing plans. Under a FFEL graduated repayment plan, the fixed amounts established at
the beginning of repayment are to be smaller at first and larger during later years of repayment,
although no payment can be more than three times greater than any other. Under an extended
repayment plan (available only to borrowers with outstanding balances over $30,000) fixed or
graduated monthly payments may be made, and no payment can be less than $50. Under the
income sensitive repayment plan, borrower payments may be adjusted annually to reflect the
borrowers’ income. Under a standard repayment plan, the borrower makes fixed monthly
payments of at least $50. All plans must lead to repayment within the statutorily established
repayment period and require minimum payments not less than interest due.
l. The following statutorily established provisions place some constraints on ED’s flexibility in
designing plans. Under the DL graduated repayment plan, borrowers are to make fixed
monthly payments at two or more levels, but no payments may be less than 50% or more than
150% of the monthly payment that would be required under a standard repayment plan. Under
the DL income contingent repayment plan, repayment amounts vary annually based on the
borrowers’ adjusted gross income (or other satisfactory documentation of income if adjusted
gross income is not available). Under the DL standard and extended repayment plans the

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borrower makes fixed monthly payments of at least $50. Under all plans offered (except income
contingent repayment) loan repayment must occur within a statutorily determined repayment
period (or a repayment period determined by regulation) and borrower payments may not be less
than interest due. For income contingent repayment, it is possible borrower payments may be
less than interest due, and loans are repaid for a period of up to 25 years — with any remaining
amount owed on the loan discharged at that time.
m. If, however, the amount of the balance on “other” outstanding loans (i.e., those not being included
in the consolidation loan) exceeds the outstanding balance on the loans being consolidated, then
the “other” loans will not be considered in establishing a schedule.
n. Underlying PLUS loans are not eligible for repayment under income contingent repayment, and
cannot be consolidated under an income contingent repayment plan.