Student Loan Consolidation

This section of FinAid discusses a loophole that allows students who have bank-based federal student loans in the FFEL program to consolidate those loans while they are still in school. This loophole was confirmed by the US Department of Education in Dear Partner Letter GEN-05-08. The loophole has been repealed, effective July 1, 2006, by the Higher Education Reconciliation Act of 2005 (HERA 2005).

Normally, only students in the Direct Loan program can consolidate their loans using the Federal Direct Consolidation Loan Program while they are still in school. Students in the FFEL program must wait until after they graduate to consolidate their loans. (All students can consolidate their loans during the grace and repayment periods.) Direct Loan borrowers who consolidated during the in-school period retained their grace periods. The ability of Direct Loan borrowers to consolidate during the in-school period was repealed by HERA 2005 effective July 1, 2006.

However, it appears that students with FFELP loans can ask that their loans be put into repayment status early. Once the loans are in repayment status, they can be consolidated.

This loophole is based on section 428(b)(7) of the Higher Education Act, which defines repayment period as follows:

REPAYMENT PERIOD. -- (A) In the case of a loan made under section 427 or 428, the repayment period shall exclude any period of authorized deferment or forbearance and shall begin --

Similar language appears in the regulations at 34 CFR 682.209(a)(5):

For a Stafford loan, the repayment period begins prior to the end of the grace period if the borrower requests in writing and is granted a repayment schedule that so provides. In this event, a borrower waives the remainder of the grace period.

Although this provision of the Higher Education Act was apparently intended to allow students to enter repayment before the end of the grace period, ending the grace period early, nothing in the act or regulations prevents a student from entering repayment before the beginning of the grace period (i.e., during the in-school period).

If a student's loans are in repayment, regardless of whether the student is still in school, they can be consolidated per section 428C(a)(3)(A) of the Higher Education Act:

DEFINITION OF ELIGIBLE BORROWER. -- (A) For the purpose of this section, the term "eligible borrower" means a borrower who --

is not subject to a judgment secured through litigation with respect to a loan under this title or to an order for wage garnishment under section 488A; and

at the time of application for a consolidation loan -- is in repayment status;

is in a grace period preceding repayment; or

is a defaulted borrower who has made arrangements to repay the obligation on the defaulted loans satisfactory to the holders of the defaulted loans.
Since the student will be in repayment, the applicable interest rate will be the repayment rate, not the in-school rate. Some lenders are giving the loans an in-school deferment before consolidating them, in order to let them lock in the lower in-school interest rate.

After the student has consolidated their loans, the consolidation loan is given an in-school deferment, delaying the repayment obligation until after the student graduates. The student loses the remainder of the grace period. Some lenders, however, are giving the students a financial benefit that is the equivalent of the lost grace period.

Thus exploiting the loophole involved a coordinated three-step process:

Ask the current holder of your loans to put them into early repayment status. The loans then are eligible for consolidation, and are at the repayment rate.
Ask the lender for an in-school deferment. This returns the loans to the in-school rate and suspends the repayment obligation.
Consolidate the loans. This locks in the in-school rate, but loses the remainder of the grace period. The in-school deferment is retained, deferring the repayment obligation until the student graduates.
This loophole applies only to students in the bank-based (FFEL) student loan program. Students in the Direct Loan program can directly consolidate during the in-school period, and so do not need this loophole.

Students who will be graduating soon should not use this loophole. Instead, they should wait until they are in the grace period to consolidate, in order to lock in the lower in-school interest rate and maximize the use of their grace period.

Not every continuing student will be able to consolidate. For a student to consolidate, there has to be a lender who is willing to consolidate their loans. Most lenders will only consolidate loans for students with loan balances of at least $7,500. A few have minimum balances of $5,000, and the Federal Direct Consolidation Loan Program has no minimum balance. So most college freshmen and sophomores will be unable to find a lender willing to consolidate their loans.
Note that exploiting this loophole requires the cooperation of the current holder of the student's loans. Lenders are not required to grant early repayment status. If the current holder of a student's loans is unwilling to give the loans early repayment status, the student will not be able to consolidate their loans while still in school. Most lenders require students to consolidate their loans with them as a condition of granting early repayment status.

Who Can Consolidate

Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)

Married students are no longer able to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible for the full amount of the loan, and the loans could not be separated if the couple got divorced. To avoid such problems in the future, Congress decided to repeal this provision as part of the Higher Education Reconciliation Act of 2005.

Students can only consolidate their education loans during the grace period or after the loans enter repayment. (Loans that are in default but with satisfactory repayment arrangements may also be consolidated.) Students can no longer consolidate while they are still in school. (The early repayment status loophole and the ability of Direct Loan borrowers to consolidate during the in-school period was repealed as part of the Higher Education Reconciliation Act of 2005, effective July 1, 2006.)

Parents, however, can consolidate PLUS loans at any time.

Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)

Married students are no longer able to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible for the full amount of the loan, and the loans could not be separated if the couple got divorced. To avoid such problems in the future, Congress decided to repeal this provision as part of the Higher Education Reconciliation Act of 2005.

Students can only consolidate their education loans during the grace period or after the loans enter repayment. (Loans that are in default but with satisfactory repayment arrangements may also be consolidated.) Students can no longer consolidate while they are still in school. (The early repayment status loophole and the ability of Direct Loan borrowers to consolidate during the in-school period was repealed as part of the Higher Education Reconciliation Act of 2005, effective July 1, 2006.)

Parents, however, can consolidate PLUS loans at any time.