20 USC 1078-3 - Federal consolidation loans

U.S Code last checked for updates: May 05, 2024

§ 1078–3.

Federal consolidation loans

(a)

Agreements with eligible lenders

(1)

Agreement required for insurance coverage

For the purpose of providing loans to eligible borrowers for consolidation of their obligations with respect to eligible student loans, the Secretary or a guaranty agency shall enter into agreements in accordance with subsection (b) with the following eligible lenders:

(A)

the Student Loan Marketing Association or the Holding Company of the Student Loan Marketing Association, including any subsidiary of the Holding Company, created pursuant to section 1087–3 of this title;

(B)

State agencies described in subparagraphs (D) and (F) of section 1085(d)(1) of this title; and

(C)

other eligible lenders described in subparagraphs (A), (B), (C), (E), and (J) of such section.

(2)

Insurance coverage of consolidation loans

(3)

Definition of eligible borrower

(A)

For the purpose of this section, the term “eligible borrower” means a borrower who—

(i)

is not subject to a judgment secured through litigation with respect to a loan under this subchapter or to an order for wage garnishment under section 1095a of this title; and

(ii)

at the time of application for a consolidation loan—

(I)

is in repayment status as determined under section 1078(b)(7)(A) of this title;

(II)

is in a grace period preceding repayment; or

(III)

is a defaulted borrower who has made arrangements to repay the obligation on the defaulted loans satisfactory to the holders of the defaulted loans.

(B)

(i)

 So in original. No cl. (ii) has been enacted.

An individual’s status as an eligible borrower under this section or under section 1087e(g) of this title terminates under both sections upon receipt of a consolidation loan under this section or under section 1087e(g) of this title, except that—

(I)

an individual who receives eligible student loans after the date of receipt of the consolidation loan may receive a subsequent consolidation loan;

(II)

loans received prior to the date of the consolidation loan may be added during the 180-day period following the making of the consolidation loan;

(III)

loans received following the making of the consolidation loan may be added during the 180-day period following the making of the consolidation loan;

(IV)

loans received prior to the date of the first consolidation loan may be added to a subsequent consolidation loan; and

(V)

an individual may obtain a subsequent consolidation loan under section 1087e(g) of this title only—

(aa)

for the purposes of obtaining income contingent repayment or income-based repayment, and only if the loan has been submitted to the guaranty agency for default aversion or if the loan is already in default;

(bb)

for the purposes of using the public service loan forgiveness program under section 1087e(m) of this title;

(cc)

for the purpose of using the no accrual of interest for active duty service members benefit offered under section 1087e(o) of this title; or

(dd)

for the purpose of separating a joint consolidation loan into 2 separate Federal Direct Consolidation Loans under section 1087e(g)(2) of this title.

(4)

“Eligible student loans” defined

For the purpose of paragraph (1), the term “eligible student loans” means loans—

(A)

made, insured, or guaranteed under this part, and first disbursed before July 1, 2010, including loans on which the borrower has defaulted (but has made arrangements to repay the obligation on the defaulted loans satisfactory to the Secretary or guaranty agency, whichever insured the loans);

(B)

made under part E of this subchapter;

(C)

made under part D of this subchapter;

(D)

made under subpart II of part A of title VII of the Public Health Service Act [42 U.S.C. 292q et seq.]; or

(E)

made under part E of title VIII of the Public Health Service Act [42 U.S.C. 297a et seq.].

(b)

Contents of agreements, certificates of insurance, and loan notes

(1)

Agreements with lenders

Any lender described in subparagraph (A), (B), or (C) of subsection (a)(1) who wishes to make consolidation loans under this section shall enter into an agreement with the Secretary or a guaranty agency which provides—

(A)

that, in the case of all lenders described in subsection (a)(1), the lender will make a consolidation loan to an eligible borrower (on request of that borrower) only if the borrower certifies that the borrower has no other application pending for a loan under this section;

(B)

that each consolidation loan made by the lender will bear interest, and be subject to repayment, in accordance with subsection (c);

(C)

that each consolidation loan will be made, notwithstanding any other provision of this part limiting the annual or aggregate principal amount for all insured loans made to a borrower, in an amount (i) which is not less than the minimum amount required for eligibility of the borrower under subsection (a)(3), and (ii) which is equal to the sum of the unpaid principal and accrued unpaid interest and late charges of all eligible student loans received by the eligible borrower which are selected by the borrower for consolidation;

(D)

that the proceeds of each consolidation loan will be paid by the lender to the holder or holders of the loans so selected to discharge the liability on such loans;

(E)

that the lender shall offer an income-sensitive repayment schedule, established by the lender in accordance with the regulations promulgated by the Secretary, to the borrower of any consolidation loan made by the lender on or after July 1, 1994, and before July 1, 2010;

(F)

that the lender shall disclose to a prospective borrower, in simple and understandable terms, at the time the lender provides an application for a consolidation loan—

(i)

whether consolidation would result in a loss of loan benefits under this part or part D, including loan forgiveness, cancellation, and deferment;

(ii)

with respect to Federal Perkins Loans under part E—

(I)

that if a borrower includes a Federal Perkins Loan under part E in the consolidation loan, the borrower will lose all interest-free periods that would have been available for the Federal Perkins Loan, such as—

(aa)

the periods during which no interest accrues on such loan while the borrower is enrolled in school at least half-time;

(bb)

the grace period under section 1087dd(c)(1)(A) of this title; and

(cc)

the periods during which the borrower’s student loan repayments are deferred under section 1087dd(c)(2) of this title;

(II)

that if a borrower includes a Federal Perkins Loan in the consolidation loan, the borrower will no longer be eligible for cancellation of part or all of the Federal Perkins Loan under section 1087ee(a) of this title; and

(III)

the occupations listed in section 1087ee of this title that qualify for Federal Perkins Loan cancellation under section 1087ee(a) of this title;

(iii)

the repayment plans that are available to the borrower;

(iv)

the options of the borrower to prepay the consolidation loan, to pay such loan on a shorter schedule, and to change repayment plans;

(v)

that borrower benefit programs for a consolidation loan may vary among different lenders;

(vi)

the consequences of default on the consolidation loan; and

(vii)

that by applying for a consolidation loan, the borrower is not obligated to agree to take the consolidation loan; and

(G)

such other terms and conditions as the Secretary or the guaranty agency may specifically require of the lender to carry out this section.

(2)

Issuance of certificate of comprehensive insurance coverage

(3)

Contents of certificate

A certificate issued under paragraph (2) shall, at a minimum, provide—

(A)

that all consolidation loans made by such lender in conformity with the requirements of this section will be insured by the Secretary or the guaranty agency (whichever is applicable) against loss of principal and interest;

(B)

that a consolidation loan will not be insured unless the lender has determined to its satisfaction, in accordance with reasonable and prudent business practices, for each loan being consolidated—

(i)

that the loan is a legal, valid, and binding obligation of the borrower;

(ii)

that each such loan was made and serviced in compliance with applicable laws and regulations; and

(iii)

in the case of loans under this part, that the insurance on such loan is in full force and effect;

(C)

the effective date and expiration date of the certificate;

(D)

the aggregate amount to which the certificate applies;

(E)

the reporting requirements of the Secretary on the lender and an identification of the office of the Department of Education or of the guaranty agency which will process claims and perform other related administrative functions;

(F)

the alternative repayment terms which will be offered to borrowers by the lender;

(G)

that, if the lender prior to the expiration of the certificate no longer proposes to make consolidation loans, the lender will so notify the issuer of the certificate in order that the certificate may be terminated (without affecting the insurance on any consolidation loan made prior to such termination); and

(H)

the terms upon which the issuer of the certificate may limit, suspend, or terminate the lender’s authority to make consolidation loans under the certificate (without affecting the insurance on any consolidation loan made prior to such limitation, suspension, or termination).

(4)

Terms and conditions of loans

A consolidation loan made pursuant to this section shall be insurable by the Secretary or a guaranty agency pursuant to paragraph (2) only if the loan is made to an eligible borrower who has agreed to notify the holder of the loan promptly concerning any change of address and the loan is evidenced by a note or other written agreement which—

(A)

is made without security and without endorsement, except that if the borrower is a minor and such note or other written agreement executed by him or her would not, under applicable law, create a binding obligation, endorsement may be required;

(B)

provides for the payment of interest and the repayment of principal in accordance with subsection (c) of this section;

(C)

(i)

provides that periodic installments of principal need not be paid, but interest shall accrue and be paid in accordance with clause (ii), during any period for which the borrower would be eligible for a deferral under section 1078(b)(1)(M) of this title, and that any such period shall not be included in determining the repayment schedule pursuant to subsection (c)(2) of this section; and

(ii)

provides that interest shall accrue and be paid during any such period—

(I)

by the Secretary, in the case of a consolidation loan for which the application is received by an eligible lender before November 13, 1997, that consolidated only Federal Stafford Loans for which the student borrower received an interest subsidy under section 1078 of this title;

(II)

by the Secretary, in the case of a consolidation loan for which the application is received by an eligible lender on or after November 13, 1997, except that the Secretary shall pay such interest only on that portion of the loan that repays Federal Stafford Loans for which the student borrower received an interest subsidy under section 1078 of this title or Federal Direct Stafford Loans for which the borrower received an interest subsidy under section 1087e of this title; or

(III)

by the borrower, or capitalized, in the case of a consolidation loan other than a loan described in subclause (I) or (II);

(D)

entitles the borrower to accelerate without penalty repayment of the whole or any part of the loan; and

(E)

(i)

contains a notice of the system of disclosure concerning such loan to consumer reporting agencies under section 1080a of this title, and (ii) provides that the lender on request of the borrower will provide information on the repayment status of the note to such consumer reporting agencies.

(5)

Direct loans

(6)

Nondiscrimination in loan consolidation

An eligible lender that makes consolidation loans under this section shall not discriminate against any borrower seeking such a loan—

(A)

based on the number or type of eligible student loans the borrower seeks to consolidate, except that a lender is not required to consolidate loans described in subparagraph (D) or (E) of subsection (a)(4) or subsection (d)(1)(C)(ii);

(B)

based on the type or category of institution of higher education that the borrower attended;

(C)

based on the interest rate to be charged to the borrower with respect to the consolidation loan; or

(D)

with respect to the types of repayment schedules offered to such borrower.

(c)

Payment of principal and interest

(1)

Interest rate

(A)

Notwithstanding subparagraphs (B) and (C), with respect to any loan made under this section for which the application is received by an eligible lender—

(i)

on or after October 1, 1998, and before July 1, 2006, the applicable interest rate shall be determined under section 1077a(k)(4) of this title; or

(ii)

on or after July 1, 2006, and that is disbursed before July 1, 2010, the applicable interest rate shall be determined under section 1077a(l)(3) of this title.

(B)

A consolidation loan made before July 1, 1994, shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to the greater of—

(i)

the weighted average of the interest rates on the loans consolidated, rounded to the nearest whole percent; or

(ii)

9 percent.

(C)

A consolidation loan made on or after July 1, 1994, and disbursed before July 1, 2010, shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to the weighted average of the interest rates on the loans consolidated, rounded upward to the nearest whole percent.

(D)

A consolidation loan for which the application is received by an eligible lender on or after November 13, 1997, and before October 1, 1998, shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to the rate specified in section 1077a(f) of this title, except that the eligible lender may continue to calculate interest on such a loan at the rate previously in effect and defer, until not later than April 1, 1998, the recalculation of the interest on such a loan at the rate required by this subparagraph if the recalculation is applied retroactively to the date on which the loan is made.

(2)

Repayment schedules

(A)

Notwithstanding any other provision of this part, to the extent authorized by its certificate of insurance under subsection (b)(2) and approved by the issuer of such certificate, the lender of a consolidation loan shall establish repayment terms as will promote the objectives of this section, which shall include the establishment of graduated, income-sensitive, or income-based repayment schedules, established by the lender in accordance with the regulations of the Secretary. Except as required by such income-sensitive or income-based repayment schedules, or by the terms of repayment pursuant to income contingent repayment offered by the Secretary under subsection (b)(5), such repayment terms shall require that if the sum of the consolidation loan and the amount outstanding on other student loans to the individual—

(i)

is less than $7,500, then such consolidation loan shall be repaid in not more than 10 years;

(ii)

is equal to or greater than $7,500 but less than $10,000, then such consolidation loan shall be repaid in not more than 12 years;

(iii)

is equal to or greater than $10,000 but less than $20,000, then such consolidation loan shall be repaid in not more than 15 years;

(iv)

is equal to or greater than $20,000 but less than $40,000, then such consolidation loan shall be repaid in not more than 20 years;

(v)

is equal to or greater than $40,000 but less than $60,000, then such consolidation loan shall be repaid in not more than 25 years; or

(vi)

is equal to or greater than $60,000, then such consolidation loan shall be repaid in not more than 30 years.

(B)

The amount outstanding on other student loans which may be counted for the purpose of subparagraph (A) may not exceed the amount of the consolidation loan.

(3)

Additional repayment requirements

Notwithstanding paragraph (2)—

(A)

except in the case of an income-based repayment schedule under section 1098e of this title, a repayment schedule established with respect to a consolidation loan shall require that the minimum installment payment be an amount equal to not less than the accrued unpaid interest;

(B)

except as required by the terms of repayment pursuant to income contingent repayment offered by the Secretary under subsection (b)(5), the lender of a consolidation loan may, with respect to repayment on the loan, when the amount of a monthly or other similar payment on the loan is not a multiple of $5, round the payment to the next highest whole dollar amount that is a multiple of $5; and

(C)

an income-based repayment schedule under section 1098e of this title shall not be available to a consolidation loan borrower who used the proceeds of the loan to discharge the liability on a loan under section 1078–2 of this title, or a Federal Direct PLUS loan, made on behalf of a dependent student.

(4)

Commencement of repayment

(5)

Insurance premiums prohibited

(d)

Special program authorized

(1)

General rule and definition of eligible student loan

(A)

In general

(B)

Applicability rule

(C)

“Eligible student loans” defined

For the purpose of this subsection, the term “eligible student loans” means loans—

(i)

of the type described in subparagraphs (A), (B), and (C) of subsection (a)(4); and

(ii)

made under subpart I of part A of title VII of the Public Health Service Act [42 U.S.C. 292 et seq.].

(2)

Interest rate rule

(A)

In general

(B)

Determination of the maximum interest rate

(C)

Publication of maximum interest rate

(3)

Special rules

(A)

No special allowance rule

(B)

No interest subsidy rule

(C)

Additional reserve rule

(D)

Insurance rule

(4)

Regulations

(e)

Termination of authority

(f)

Interest payment rebate fee

(1)

In general

(2)

Special rule

(3)

Deposit

(Pub. L. 89–329, title IV, § 428C, as added Pub. L. 99–498, title IV, § 402(a), Oct. 17, 1986, 100 Stat. 1388; amended Pub. L. 100–50, § 10(s), June 3, 1987, 101 Stat. 345; Pub. L. 102–325, title IV, § 419, July 23, 1992, 106 Stat. 532; Pub. L. 102–408, title III, § 306(a), (b), Oct. 13, 1992, 106 Stat. 2084, 2086; Pub. L. 103–66, title IV, §§ 4046(a), (b)(2), 4106(a), Aug. 10, 1993, 107 Stat. 360, 363, 368; Pub. L. 103–208, § 2(c)(33)–(37), Dec. 20, 1993, 107 Stat. 2466; Pub. L. 103–382, title III, § 356, Oct. 20, 1994, 108 Stat. 3967; Pub. L. 104–208, div. A, title I, § 101(e) [title VI, § 602(b)(1)(A)(ii)], Sept. 30, 1996, 110 Stat. 3009–233, 3009–283; Pub. L. 105–33, title VI, § 6104(3), Aug. 5, 1997, 111 Stat. 652; Pub. L. 105–78, title VI, § 609(b)–(e), Nov. 13, 1997, 111 Stat. 1522, 1523; Pub. L. 105–244, title IV, §§ 416(b)(2), 420, Oct. 7, 1998, 112 Stat. 1682, 1695; Pub. L. 107–139, § 1(a)(2), Feb. 8, 2002, 116 Stat. 8; Pub. L. 109–171, title VIII, §§ 8004(b)(3), 8009(a), (b)(2), (c), Feb. 8, 2006, 120 Stat. 158, 163, 164; Pub. L. 109–234, title VII, § 7015(a), (c), (d), June 15, 2006, 120 Stat. 485; Pub. L. 110–84, title II, § 203(b)(1), (2), Sept. 27, 2007, 121 Stat. 794, 795; Pub. L. 110–315, title IV, §§ 425(a)–(b)(2), (c), (d)(1), (e), 432(b)(3), Aug. 14, 2008, 122 Stat. 3233–3235, 3246; Pub. L. 111–39, title IV, § 402(c)(1), (f)(3), July 1, 2009, 123 Stat. 1940, 1943; Pub. L. 111–152, title II, § 2206(a), Mar. 30, 2010, 124 Stat. 1075; Pub. L. 117–200, § 2(b), Oct. 11, 2022, 136 Stat. 2221.)

cite as: 20 USC 1078-3