Types of programs

Even though the HEA authorizes both FFEL and Direct Loan consolidation programs, a number of differences exist between the programs, as noted below:

Types of eligible loans

As explained in the section on loans eligible for consolidation, both programs may consolidate FFEL, Perkins, and the health education loans, but only the Direct Loan Consolidation Program may consolidate Direct Loans.

Lender options

The Direct Loan consolidation program must accept all eligible loans that are requested to be consolidated by an eligible borrower. However, not all FFEL consolidation lenders will include non-FFEL loans in consolidation. For example, some FFEL lenders will not include a HEAL loan in their FFEL consolidation loans but may offer a separate consolidation loan with different terms.

Interest rate

The interest rate on a FFEL Consolidation Loan is the weighted average of the original interest rates of the consolidated loans rounded up to the nearest whole percent. The interest rate for a Direct Consolidation Loan is the weighted average of the interest rates on the loans being consolidated (as of the date the application is received), rounded to the nearest higher one-eighth of one percent. This rate is fixed for the life of the loan and cannot exceed 8.25 percent.

Loan benefits

Federal Direct Consolidation loans retain the underlying loan types so that a borrower can keep the interest subsidy benefit of the subsidized student loans that were in the consolidation. For example, if the borrower returns to school, the portion of the consolidation loan that represented subsidized loans would receive subsidy benefits. However, FFEL consolidation loans that paid off both subsidized and unsubsidized loans lose their identity and the entire loan becomes unsubsidized.