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I mean, who ever heard of a loan deal where the lender gets to say whether or not you are allowed to pay him off (when there's no prepayment penalty of course). The lender is being given back the money that they lent the student--except the "back" part is coming from the Department of Education. What's the difference if the student wrote the check out him/herself, from the lender's perspective?

It sounds like the lenders are lying/footdragging/etc. because they don't want to be paid off, they want the student to be stuck paying 9% or 8.25% or whatever. If that really were the rule, the Direct Loan information packet should have read, "you can consolidate at Direct if your current lender finds that acceptable."
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