Policy Frequently Asked Questions: Servicing a ‘Split’ Consolidation Loan

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.