GEN-05-08; FP-05-05
Subject: Lenders' Options for Determining Federal Consolidation Loan Interest Rates and Permitting Borrowers to Enter Repayment Early
Summary: This letter addresses questions relating to the determination of consolidation loan interest rates under the Federal Family Education Loan (FFEL) Program and clarifies the early repayment option available to borrowers under Section 428(b)(7) of the Higher Education Act of 1965, as amended.
Dear Colleague:
FFEL Consolidation Loan Weighted Average Interest Rate
Consolidation loans have
fixed interest rates that are based on the weighted average of the interest
rates on the loans being consolidated. A lender can provide a new consolidation
loan borrower with the lowest statutory weighted average interest rate for loans
by using the lower of the weighted average of the interest rates on the loans
being consolidated as of July 1 or the date the lender received the borrower's
consolidation loan application. The lender should apply a consistent method
of determining when an application is received.
If a borrower specifically
requests that his or her loan be disbursed prior to July 1st, the lender should
honor the borrower's request, if possible.
This guidance is consistent
with the Department's treatment of consolidation loan interest rates for Direct
Consolidation Loans.
Permitting Borrowers
to Enter Repayment Early
Under the Higher Education
Act of 1965, as amended and the Department's regulations, a borrower can request
a repayment schedule that provides for repayment to commence at a date that
is earlier than six months after the date the borrower ceases to carry at least
one-half the normal full time academic workload. If the lender grants the request,
the loan enters the repayment period and the borrower waives any applicable
grace period. This is the case even if the borrower is currently enrolled in
school.
Such a borrower will be
eligible to obtain a consolidation loan to repay the loan on which early conversion
to repayment was granted, assuming all other eligibility criteria are met. As
stated above, the borrower waives any applicable grace period, now and in the
future.
If the lender determines
that the borrower is still enrolled, the lender can put the loan that will now
be in repayment, into an in-school deferment status at the borrower's request.
The interest rate on the loan would be the deferment rate. If the borrower consolidates
the Stafford Loan, the deferment interest rate should be used in calculating
the weighted average interest rate on the consolidation loan.
We have attached answers
to some questions submitted by the National Council of Higher Education Loan
Programs (NCHELP) that provide more detail on the issues addressed in this letter.
Should you have questions concerning the guidance provided in this letter, please
contact Pam Moran at (202) 502-7732 or George Harris at (202) 502-7521.
Sincerely,
Sally L. Stroup
Assistant Secretary
Office of Postsecondary Education
Attachments/Enclosures:
Questions & Answers (Q&A)
Permitting Borrowers to Enter Repayment
Early
Q1. May a Federal Family Education Loan (FFEL) Stafford
Loan borrower currently attending school on at least a one-half time basis
request that his or her loan be placed into repayment to qualify that loan for
inclusion in a FFEL consolidation loan?
A1. Yes, a FFEL Stafford Loan borrower may request the
lender of his or her loan to put the loan into repayment status even if the
student is still enrolled and plans to remain enrolled. When the loan moves
directly into repayment status, the borrower loses the benefit of a grace
period, now and in the future.
Q2. Does the request by the borrower to enter repayment
status early need to be in writing?
A2. The request does not need to be in writing.
Q3. Is the lender of the FFEL Stafford Loan required to
grant the borrower's request to enter repayment status early?
A3. Lenders are not required to grant a borrower's request to enter
repayment status early.
Q4. If a borrower wants to consolidate a Stafford Loan
on which the borrower entered repayment status early, what interest rate for
the underlying loan should be used when computing the weighted average interest
rate on the consolidation loan?
A4. If the lender determines the borrower is still
enrolled, the lender can put the Stafford Loan, that will now be in repayment
status, into an in-school deferment status at the borrower's request. The
interest rate on the loan would be the deferment rate. If the borrower
consolidates the Stafford Loan, the deferment interest rate would be used in
calculating the weighted average interest rate on the consolidation loan.
Q5. Does the borrower forfeit the right to a grace
period on the Stafford Loan that was put into repayment status?
A5. By entering repayment early, the borrower forfeits his or her grace
period on the Stafford Loan.
Q6. How long can a lender hold a Consolidation Loan
application received before July 1 before making the Consolidation Loan at the
pre-July 1 interest rate?
A6. A lender may hold an application only for the
period of time necessary to receive and process the loan verification
certificates and disburse payoff amounts to the borrower's loan holders.
Q7. Can a lender consider a borrower's loans to not be in
an in-school status if the borrower is not in attendance in courses during the
summer break period?
A7. No, a borrower who would normally be considered
enrolled during the summer break period under current program guidance must
make a specific request to have his or her loans put into repayment status
early.
GEN-05-08
and FP-05-05: Lenders' Options for Determining Federal Consolidation Loan Interest
Rates and Permitting Borrowers to Enter Repayment Early in PDF Format, 526KB,
3 pages
Posted May 17, 2005 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
Please submit Web Site questions or comments to web@nasfaa.org
