Federal Direct Consolidation Loans Information Center: What is the Consolidation Process?

When a borrower consolidates loans in the Direct Consolidation Loan Program, the U.S. Department of Education (Department) 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 Review

We review the borrower's application and enter it into our system. If there is missing or incorrect information, we 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 Department 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 cancelled.

Step 2: Loan Verification

We request verification of the information on the borrower's application to determine each loan's eligibility for consolidation and its payoff balance. Currently, we electronically verify Direct Loans, defaulted loans held by the Department, loans serviced by loan holders enrolled in our Electronic Verification Certification (EVC) service, and loans held by Sallie Mae. For all other loans, we send a verification certificate to each loan holder to obtain the required information. Loan holders have ten business days to complete the verification certificate and return it to us.

Step 3: Income Contingent Repayment Processing

A 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 an "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, we request additional information from the borrower.

Step 4: Loan Statement Sent to Borrowers

A 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 5: Payment to Loan Holders

If a loan is not in default, we send the loan pay-off to the loan holder or credit the borrower's Direct Loan account. If a loan is in default, the Department’s Default Resolution Group 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 Consolidation Department, 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 us of the underpaid amount. We work with the loan holder(s) to resolve any underpayment or overpayment issues. (See "How do I request an underpayment or return an overpayment?" or "What are the Tolerances for Under and Over Payments?")

Step 6: Account Set-Up

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 disbursement of the Direct Consolidation Loan.

NOTE: Borrowers are required to continue making payments with their current loan holder(s) until they receive written notification that their loan(s) has been successfully consolidated.

Step 7: Adding Loans to an Existing Direct Consolidation Loan

Borrowers 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 [PDF Format (28K)] form. After 180 days, the borrower must complete a new application.