Consolidation Loans

  • How does a defaulted consolidation loan display in the cohort default rate? Is the default reflected in the CDR at each school the student attended?

    Underlying Stafford loans in a consolidation loan are included in the cohort default rate calculation for each school that certified the loans. Considering that a borrower may have consolidated several Stafford loans obtained to attend several different postsecondary institutions, a default on a consolidation loan could affect the cohort default rates of several schools.

    Section 16.2 of the Common Manual provides additional information about cohort default rates in relation to consolidation loans.

  • If a consolidation-loan borrower chooses to combine both subsidized and unsubsidized loans, our loan-servicing system will not allow us to combine all the loans into a single loan record. We “split” the single consolidation loan into two records for servicing, with one record containing all of the subsidized loans and the other containing all of the unsubsidized loans. We have the following questions about servicing these loans:
    • When we calculate the weighted-average interest rate, is it the rate of all the loans the borrower requested that we consolidate, or can we calculate the weighted average for each separate loan record?
    • If the borrower adds a loan during the “180-day add-on” period, how do we recalculate the repayment amount and interest rate?
    • How do we file a default claim on the separate loan records if one of the loans becomes more past-due than the other?
    The consolidation loan is a single loan made under the provisions of a single note. The servicing accommodations that may be required of a lender to manage the mixture of loan subsidies or loan types do not affect the administration of the single loan. A consolidation loan has a single, weighted-average interest rate, and a single repayment schedule with one first-payment due date under which the lender expects a single payment from the borrower. Additionally, a lender should provide forbearance and deferment on the two parts of the loan in an identical manner. The following answers address your questions about servicing a “split” consolidation loan:
    • Because the consolidation loan is only one loan, even if the lender has two loan records, the weighted-average interest rate of the loan is a single calculation. That calculation is based on the respective balances of all of the loans being combined under the single note.
    • If the borrower adds loans during the 180-day add-on period, the lender must calculate a revised weighted-average interest rate and repayment schedule, based on the full loan amount. Even if the consolidation loan was administered under two or more loan records, this weighted average should take into consideration the combination of all loans made under a single consolidation note. The lender may provide a new payment-due date, for the new amount. Because there is only one loan, the weighted-average rate and the revised repayment schedule are calculated on the entire sum of the loans being consolidated.
    • Regardless of how the lender services the loan, the borrower is responsible for only one payment amount, due on a single date. So the loan can default on one date only. The lender should file the entire loan as a single claim file, and complete a single claim form, based on that one default date.

    USA Funds® notes that if a lender files a consolidation-loan-default claim with two separate loan records, and each has a different payment-due date, USA Funds will not pay the claim on the loan and will return the claim file to the lender for a cure of due-diligence violations.
  • A borrower has one Federal Stafford loan that is showing as “ineligible” but four other loans that appear to be eligible loans. The borrower wants to get a Federal Consolidation loan. Is she eligible to consolidate at all? Which loans can she consolidate?
    The borrower is eligible to consolidate the four Stafford loans that are not shown as “ineligible.” If the borrower has a loan outstanding that is ineligible due solely to the actions of the borrower, then that loan may not be included in the consolidation. See federal regulations 34 CFR 682.412, page 64,383.

    You will need Adobe Acrobat Reader to download the regulations.
  • If a borrower consolidates Stafford loans and then applies for teacher loan forgiveness, is the borrower eligible for loan forgiveness on the underlying loans? Or, should the borrower opt to delay loan consolidation until after the end of the borrower’s fifth year of qualifying service?
    The borrower may be eligible for teacher loan forgiveness on all or a portion of a Federal Consolidation loan, depending on certain aspects of the underlying loans. Only the outstanding portion of the Consolidation loan that was used to pay off loans that meet the discharge criteria — none made before October 1998 and all made before the end of the period of qualifying service — is eligible for loan forgiveness. The teacher is not penalized for consolidating loans prior to applying for the loan forgiveness, per federal regulations34 CFR 682.215(d)(1).

    You will need Adobe Acrobat Reader to download the regulations.
  • Can borrowers consolidate their loans while they are in school? We’ve heard different interpretations of the change in the law.
    The Higher Education Reconciliation Act of 2005 eliminates a federal education-loan borrower’s option to enter repayment early, effective July 1, 2006. Under that law, for Federal Stafford loans, the key criterion in considering eligibility for consolidation is whether the borrower has entered the grace period on that loan.
    • For a borrower in school whose Federal Stafford loan is in an enrolled status, the loan is not eligible for consolidation.
    • For a borrower in school with a Stafford loan whose grace period has expired, the loan is eligible for consolidation.
    • For a borrower in school with a Stafford loan whose grace period has expired and the loan now is in an in-school deferment, the loan is eligible for consolidation.
    Note that a student who is anticipated to return to school in the fall is considered to be enrolled for the summer term, so the period between the end of the spring semester and the start of the fall semester does not create an opportunity for the student to consolidate outstanding Stafford loans.

    For a graduate or professional student with a Federal PLUS loan in an in-school-deferment status, the loan is eligible for consolidation when the loan is fully disbursed, because PLUS loans are considered to be in repayment starting on that date.
  • We received and processed a signed consolidation-loan application. After making the disbursement, we received notification that the consolidation-loan borrower had died before the date that the consolidation loan was disbursed. Do we file a claim on the consolidation loan, or are we required to “undo” the consolidation loan and file a death claim only on the loan that we held at the time of the borrower’s death?
    Lenders are not permitted to disburse federal education loans — including consolidation loans — to deceased borrowers. A borrower ceases to be an “eligible borrower” as of the date of the borrower’s death.

    Based on this premise, the consolidation loan must be “undone,” since it never was a valid loan. The holders of the underlying loans must return the balances of those loans to their original statuses on the loan holders’ systems. Once the loans are rebooked and the loan holders have received acceptable documentation of the borrower’s death, they may file death claims on the loans.
  • If a borrower includes a partially disbursed Federal Stafford loan in a consolidation loan, can the original holder of the partially disbursed Stafford loan make the subsequent disbursements?
    Once the partially disbursed Stafford loan is paid in full through the consolidation, the loan is considered paid in full and no longer valid for subsequent disbursements. To obtain additional Stafford-loan funds, the borrower would need to apply for another loan.
  • A borrower has requested loan consolidation, but one loan is shown as being "ineligible." Can this loan be included in the consolidation loan?
    Borrowers with outstanding ineligible loans lose eligibility for additional Title IV aid, including Federal Consolidation loans. In addition, borrowers may not consolidate their other outstanding loans until the ineligible-loan issues are resolved.

    Borrowers regain eligibility for Title IV aid only upon full repayment of the ineligible loan or the ineligible portion of a loan.
  • If a Federal Consolidation-loan promissory note has a second signature, belonging to a spouse who has not listed a loan to be included in the consolidation, does USA Funds consider that spouse to be a co-borrower?
    Yes. According to USA Funds policy, the spouse is a co-borrower, regardless of whether both spouses had loans included in the consolidation. USA Funds does not guarantee consolidation loans with co-borrowers. If a lender receives a Federal Consolidation-loan note with a second signature, the lender is responsible for ensuring that the person to whom the second signature belongs marks out the signature and initials the change, or that a new note is negotiated with the borrower. Then USA Funds will guarantee the loan as a single consolidation loan.