Consolidation

You should consider the  pros and cons of consolidation  before making this choice. This section contains information about how to consolidate if you have already defaulted on your loans.

Consolidation works well for many borrowers with defaulted loans. After obtaining a consolidation loan, you get a fresh start, becoming eligible for new loans, grants, and even deferments. You will no longer be listed as currently in default on your credit records, and no longer subject to tax intercepts, garnishments, or other collection efforts.  Once you are out of default, you can also choose one of the income-based repayment plans .

WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. This is because you will lose your rights under the federal loan programs once you choose to consolidate with a private lender. These include deferment, forbearance, cancellation, and affordable repayment rights. 

Federal Consolidation Loans for Borrowers in Default

As of July 1, 2010, the Direct Loan consolidation program is the only government consolidation loan program. You are eligible to consolidate with the Direct Loan program as long as you have at least one FFEL or Direct Loan.

Direct Consolidation allows defaulted borrowers to make three consecutive reasonable and affordable monthly payments or agree to pay under  Income Contingent Repayment (ICRP) or Income Based Repayment  (IBR).  An interruption in this consecutive period is allowed for qualifying military service members or affected civilians. These borrowers may resume their payments after their service is completed. See the programs for military  section of this site for information about other options for military service members and certain civilians affected by war or national emergencies.

Parent PLUS borrowers who also have other federal student loans and choose to consolidate with Direct will find that the PLUS loan taints the entire consolidation loan and will mean that they will not be eligible to repay the consolidation loan using IBR.  If they wish to consolidate, parent PLUS borrowers may exclude the PLUS loans from the consolidation and pay them separately.  These borrowers should also be able to consolidate and choose ICR.

Despite what a collector may tell you, if you select ICRP or IBR, you do not have to make three payments before applying for consolidation.

As of May 18, 2014, there is a new process to apply for Direct Loan consolidation.  All borrowers, including those in default, must apply on-line through studentloans.gov or download the paper application and mail it to the Department.

Before the Department will consolidate the loan, they will send you a summary sheet that lists the loans that will be included in the consolidation.  It will also list the repayment plan that you selected.  You should review this information carefully and contact the Department if there are any problems.  If you do not contact them within fifteen days of the date of the letter. they will assume the information is correct and will process the consolidation.  You must contact the Department during this period if you want to discontinue the consolidation or if you have questions.

While they are collecting the information needed to make the monthly payment calculation, the Department may ask you to pay an initial amount that covers the monthly interest.  If you cannot afford this payment, you may request a forbearance  that will last until you are notified of your actual payment.

In most cases when you are consolidating out of default, the lender will add collection costs to the new loan balance.  This should be no more than 18.5% of the outstanding principal and interest.

You will run into problems if you defaulted on a consolidation loan and now want to consolidate again. If you defaulted on a FFEL consolidation loan, you may consolidate with the Direct Loan program, but only if you are selecting an ICRP or IBR. You can also consolidate with Direct Loans to use the public service forgiveness program  or the limits on interest accrual for military service-members.

If you defaulted on a Direct consolidation loan, you cannot consolidate again with either program unless you are adding new loans to the consolidation. But all is not lost. You can look into getting out of default by rehabilitating your loan.

Should I consolidate or rehabilitate my federal student loan?