What is a Consolidation Loan?

A Federal Consolidation Loan is a loan program that allows you to combine all of your previous Federal loans (such as Stafford and Perkins Loans) into one loan. The lender you choose for your consolidation loan pays off loan balances of all loans you want consolidated, then creates a new loan with a new repayment schedule.

• There are no credit checks or fees for the consolidation loan
• It takes about 6-8 weeks to receive payoff information from your lenders, review your application for completeness, and disburse your new consolidation loan to your lenders.

Interest Rate

The Consolidation Loan interest rate is fixed (locked in). It is based on the weighted average of the interest rates of all loans being consolidated, rounded up to the nearest 1/8%. The interest rate cannot exceed 8.25%.

For example: suppose a student has just Stafford Loans originated on or after July 1, 2006. These loans have a fixed interest rate of 6.8%. When they are consolidated by themselves, the consolidation loan will have an interest rate of 6 and 7/8ths of a percent, or 6.875%. So the interest rate increases only slightly.

If the borrower has a mix of loans with different interest rates, the weighted average will be somewhere in between. For example, if the borrower has $5,000 of Perkins Loans (at 5.0%) and $10,000 of Stafford Loans (at 6.8%), the weighted average is 6.2%.

This weighted average, 6.2%, is then rounded up to the nearest 1/8th of a percent, yielding a consolidation loan interest rate of 6.25%.

Eligibility

You can consolidate if you:

• Have fully disbursed federal education loans, such as Stafford or Perkins Loans.
• Have graduated, left school, or are enrolled less than half-time.
• Have met minimum balance requirements (set by each lender).
  

Reconsolidation

If you consolidated your loans in the last year but have borrowed new Stafford Loans since, you may be eligible to either add the new Stafford Loans into your consolidation loan or borrow a new consolidation loan to combine the two. Please contact the lender of your consolidation loan for more information.

Lenders

If all of your loans are through the same lender, and that lender offers a Federal Consolidation Loan, then you should borrow through that lender for your consolidation as well.

If you have borrowed from different lenders, or if your lender doesn't offer a consolidation loan, then you can pick the lender of your choice. But be careful! Over the last few years, lots of new consolidation companies have popped up overnight. Many provide good service, but some may not be able to provide the service you need or want. It is always a good practice to know a lender and its reputation.

To view your lender and/or summary of federal student loans that have been disbursed, you may visit www.nslds.ed.gov. You will need your FAFSA PIN to sign in to www.nslds.ed.gov. If you do not have a FAFSA PIN or missed placed it, you can request a new or duplicate PIN at www.pin.ed.gov.

If you will be entering a career in public service, you may want to consider consolidating into the Federal Direct Consolidation loan. This loan offers loan forgiveness opportunities for public servants that the FFEL Consolidation loan does not.

Benefits of Consolidation

• If you have a large loan debt, the Consolidation Loan may offer longer repayment periods (meaning your payments would be spread out over a longer period of time). Therefore, your monthly payments could be significantly lower.
• Consolidating your loans would mean locking in a fixed interest rate. (For Stafford loans disbursed before July 1, 2006 the interest rate is 6.62% in school and 7.22% out of school. For Loans disbursed after July 1, 2006 the Stafford interest rate is fixed at 6.8% and the Grad PLUS rate is fixed at 8.5%).
• If you have loans through different lenders, consolidating would simplify repayment by replacing all of your federal education loans with a single loan payment.
• Like Stafford & PLUS, you can pay off your loan early with no penalty.

Drawbacks of Consolidation

• For graduating students or students who have ceased enrollment, you may lose the remainder of your 6-month Stafford Loan no-payment grace period since repayment begins immediately once you have consolidated your loans.
• You may lose out on repayment benefits such as interest or principal reductions that your Stafford Loan lender offers.
• Because of the extended repayment time of a Consolidation Loan, you may pay more interest over the life of the loan (same loan total + more time to pay = more interest). But just because you’re offered an extended repayment term doesn’t mean you have to take it. There is no penalty for making extra payments on your student loans or applying those extra payments to principal only.
• You may lose loan forgiveness benefits that some of your current loans might offer.
• Consolidation is usually a one-time process. If you consolidate now, and the interest rates drop even lower in the future, you will not be able to re-consolidate unless you have borrowed a new loan.

Tips

1. Apply for the Consolidation Loan during your grace period to keep your loan, in school interest rate.
2. Even if you receive an extended loan repayment period and locked-in low interest rate, continue to make the same monthly payment as before consolidation. This step will permit you to pay off your loan more quickly and save even more interest.
3. Some consolidation lenders offer you the opportunity to consolidate your credit card debt and/or Alternative Loans along with your Federal Loans. These types of Consolidation Loans are private loans that generally do not have the same benefits as the Federal Consolidation Loan. If you consolidate other types of loans or debts with your student loans, you risk raising substantially the overall interest on the loan.

For More Information

This information was compiled from the following sites. If you would like more information on consolidation, please contact your lender or visit the sites below: