Student Loan Consolidation

So you’ve just spent four years juggling college courses, course textbooks, and possibly even college relationships. Now that it’s all over, what do you get in return? You get to juggle college debts!

Fortunately, banks have realized that many students have had enough of juggling. That’s why debt consolidation exists. Instead of paying out different amounts to different lending institutions, you can consolidate all the loans you took out to fund your education into one, use it to pay off your original loans, and focus on paying off ONE loan instead of many.

Under the Direct Consolidation Loan Program, the Department of Education repays the original federal education loans and creates a new loan for the total amount of the loan(s) consolidated. The process takes several steps.

Application Review

First, the borrower’s application is reviewed. Missing or incorrect information is identified. The borrower must supply the correct information within 14 days. Otherwise, the application is deactivated.

Credit Check

This step applies only to PLUS borrowers. PLUS stands for Parents’ Loan for Undergraduate Students. It is a loan available to parents of dependent students. The parent is responsible for paying the interest on the loan while the student is in school. All student loan consolidation applications that include a PLUS loan require the borrower to undergo a credit check to make sure he or she does not have an adverse credit history. PLUS loan standards define an adverse credit history as being 90 days or over delinquent on any debt, or as having been the subject of default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt during the 5 years up to the credit report. In the case of an adverse credit history, the borrower receives a letter detailing his or her options for including the PLUS loan in the consolidation. Options include:

  • Appealing the credit check
  • Documents detailing extenuating circumstances
  • Finding an endorser, or co-singer, for the PLUS portion of the consolidation loan
  • Exclude the PLUS Loan from the student loan consolidation

Loan Verification

Next, the Department of Education checks out the loan itself. The purpose of this step is to determine the loan’s eligibility for consolidation, as well as its payoff balance. Some loans can be verified electronically by the Department. These loans include:

  • Direct Loans
  • defaulted loans held by the Department
  • loans held by Sallie Mae (the U.S. leading provider of education funding)

For all other loans, the Department will send a verification certificate to the borrower requesting the information necessary to verify the loan. If the borrower holds a Perkins Loan (a low-interest loan directly from the school), the verification certificate will be sent directly to the school.

Complete and return your verification certificate within 10 days.

Contingent Repayment Processing

Some borrowers are on the Income Contingent Repayment (ICR) Plan, a payback plan that bases monthly repayments on the borrower’s yearly income. The monthly amount rises and falls according this income. Borrowers on ICR plans must submit an "ICR Consent to Disclosure of Tax Information" form, a form that verifies income information. The Department of Education forwards this form to the IRS for approval. Should the IRS not approve the information, the Department seeks further information from the borrower.

Loan Statement Summary Package

Once everything has been verified, the Department of Education sends the borrower a loan statement summary package. At the same time, the Department makes payments to the lenders.

Payment to Lenders

Once the loan has been checked out and verified, the Department of Education either mails a check to the lender or credits the borrower’s Direct Loan account. If the loan is in default, the Department's Debt Collection Service or the Guarantee Agency will get an electronic payment manifest called an SF-1081 for the principal and interest, and a check covering collection costs.

Regulations require that a lender fully discharge the debt and notify the borrower that the loan had been paid in full upon receiving a payment from the Loan Origination Center.

Once the loan has been paid off, any payment made by the borrower to the previous lender is considered an overpayment, forwarded to the Department of Education, and applied to the consolidation loan balance.

Account Set-Up

Once the original loans are paid off, the borrower’s Direct Consolidation Loan accounts are set up. Once the account is in existence, borrowers get important information about the status of their loan and payment due dates. Typically, the first student loan consolidation payment is due within 60 days of the first payment of the Direct Consolidation Loan.

Borrowers: note that until you have received, in writing, notification that your loans have been successfully consolidated, you must keep making payments to your current lenders.

Adding Loans to an Existing Direct Consolidation Loan

Borrowers can add loans to their student loan consolidation for the first 180 days after the first payment of their student consolidation loan by completing a downloadable PDF form, available online. After this period, borrowers must complete new applications.