Student Loan Consolidation Process

Student Loan Consolidation Process
When a borrower consolidates loans in the Direct Consolidation Loan Program, the Department of Education pays off the original federal education loans and originates a new loan for the total amount of the loan(s) consolidated. Here's how that works:Step 1: Application ReviewThey review the borrower's application and enter it into our system. If there is missing or incorrect information, They attempt to contact the borrower directly and/or send a letter identifying the needed information. If a borrower applied for the loan by phone or through the web, the Loan Consolidation Center sends a promissory note to be signed and returned by the borrower. The borrower has 14 days to provide the information to us or the application is deactivated.Step 2: Credit Check (for PLUS borrowers only)If the application includes a PLUS Loan, They perform a credit check on the borrower. If the borrower has an adverse credit history, they send a letter that outlining his or her options for including the loan in the consolidation. 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.Step 3: Loan VerificationThey request verification of the information on the borrower's application to determine each loan's eligibility for consolidation and its payoff balance. Currently, They electronically verify Direct Loans, defaulted loans held by the Department, and loans held by Sallie Mae. For all other loans, they 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 them.Step 4: Income Contingent Repayment ProcessingA borrower who must use the Income Contingent Repayment (ICR) Plan due to a defaulted loan OR who selects the ICR plan as a matter of choice must submit a "ICR Consent to Disclosure of Tax Information" form. This form, which verifies income information, is forwarded to the IRS for approval. If the waiver is denied, they request additional information from the borrower.Step 5: Loan Statement Sent to BorrowersA loan statement summary package is mailed to the borrower and payments are mailed to the lenders simultaneously after his or her loans are verified.Step 6: Payment to Loan HoldersIf a loan is not in default, they 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. Participants in EFT (Electronic Funds Transfer) receive these payments electronically.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 underpay the loan.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 them of the underpaid amount. They work with the loan holder(s) to resolve any underpayment or overpayment issuesStep 7: Account Set-UpThe Borrowers' Direct Consolidation Loan accounts are set up when their loans are paid off. Once account set up is complete, borrowers receive important information about their loan status and payment due dates. Normally, their first payment is due within 60 days of the first disbursement of the Direct Consolidation Loan.NOTE: Borrowers are required to continue making payments with their current lender(s) until they receive written notification that their loan(s) has been successfully consolidated.Step 8: Adding Loans to an Existing Direct Consolidation LoanBorrowers have 180 days after the first disbursement of their consolidation loan to add a loan(s) to the consolidation by completing the Request to Add a Loan to an Existing Federal Direct Consolidation Loan form. After 180 days, the borrower must complete a new application.