Consolidation Options

What is federal loan consolidation and which loans can be consolidated?

A federal consolidation loan converts several federal student loans into one new loan with new repayment terms.

The following loans may be included in federal consolidation:

• Federal Stafford (Subsidized and Unsubsidized) Loan
• Federal Perkins Loan
• GradPLUS Loan

Commercial loans may not be included in a federal consolidation loan. Some lenders, however, will include all loans a student has with that lender, both federal and commercial, in one bill. This allows for one monthly statement and easier debt management after graduation.

Is it financially worthwhile to consolidate? What is the interest rate of the consolidated loan?

Consolidation is no longer a "sure thing" as it was over the past several years, but there are several possible reasons to consolidate loans, which include:

• Bringing loans from multiple lenders together under one lender
• Lowering monthly payments by lengthening the repayment term
• Locking in an interest rate (The interest rate will be the weighted average of the consolidated loans rounded up to the nearest 1/8%).

Federal Stafford loans disbursed on/after July 1, 2006, have a fixed interest rate of 6.8%. You may not want to consolidate these loans as they already have a fixed interest rate, as well as Perkins loans, which have a fixed interest rate of 5%. In general, consolidation is recommended only when these three conditions are met:

• You have not previously consolidated your loans and
• Your current interest rate is variable and
• You will need a longer repayment term

In the alternative, consolidation may be appropriate to take advantage of an offered repayment incentive.  See the "What questions should I ask..." section (below).

Who offers loan consolidation programs?

There are two different consolidation programs available to federal loan borrower:.

Consolidation by Lenders and Servicers
One option is to consolidation offered by lenders and servicers that participate in the Federal Stafford Loan program. Since various lenders and servicers may offer different consolidation options, you should compare the various programs that are available to you.

The Financial Aid Office DOES NOT recommend consolidation with an unknown lender that solicits your application by phone, mail or email. The “profit” for lenders and servicers in a consolidation loan is very thin. Be wary of any offers of savings greater than .75% over the life of the consolidation loan as such offers are usually hard to qualify for and would bankrupt the lender and servicer if everyone qualified.

Consolidation by the U.S. Department of Education
The second option is consolidation offered by the U.S. Department of Education through the Federal Direct Loan program. This consolidation is especially useful if you wish to take advantage of income contingent loan payments, which base your payments on the total student loans owed, your current salary and your “ability” to repay. More information about this consolidation program is available on The Department of Education website.

 

How do I qualify for federal loan consolidation?

You must consolidate at least $7,500. You may request a repayment term up to 30 years if you consolidate loans totaling at least at least $60,000.

When can I sign up for federal loan consolidation?

To consolidate your loans you must be in repayment or in your grace period following graduation or dropping below 1/2 time status.

If you are in a grace period rate on any non-consolidated variable-rate federal loans, you may wish to apply before the grace period expires; if you apply after this date, you may pay a higher interest rate.

Looking for a repayment option other than consolidation?

Lenders are required to offer income-sensitive federal loan repayment, however, the terms of each lenders’ programs vary significantly. These plans schedule your federal Stafford Loan debt over the normal 10-year repayment period, but may provide lower initial payments. In this instance, the loans are not considered consolidated and you will be charged the interest rate that is in effect during that given year.

Students that borrowed their first Federal Stafford Loan after October 7, 1998 are eligible for repayment periods of up to 25 years without consolidation. This is useful for students with the new fixed-rate 6.8% Federal Stafford Loans. Contact your lender to find out what terms are offered to you.

What’s the difference between serialization and consolidation?

If you have borrowed all of your student loans from one lender, serialization simplifies your repayment by allowing one monthly payment, rather than multiple payments for each separate loan. Unlike consolidation, serialization DOES NOT fix the interest rates on your loans.

What questions should I ask before choosing a consolidation provider?

• What incentives are offered for repayment features such as on-time payments and auto-debit?
• If there is an on-time payment incentive, do I lose it completely if I’m late once?
• What is the lender's actual or expected success rate for the incentives offered? Is that rate published?
• Will I loose any current loan program benefits, especially Perkins cancellation or forgiveness, which I might want to access later?
• What flexibility do I have in selecting the length of repayment? Can I choose a shorter term up front, or change the length of the repayment term during repayment?

Where can I get more information about federal loan consolidation?

First, contact your lender. If the lender does not participate in the loan consolidation program, you may want to apply with Access Group, T.H. E. or the Federal Direct Loan Service Center.

Where can I calculate my loan repayment amounts?

You may calculate your expected loan payments under various repayment options including level repayment, graduated repayment, income sensitive repayment and consolidation:

• www.northstar.org/consolidation/calculators.aspx
• www.accessgroup.org/calculators/index.htm
• www.ed.gov/directloan/calc.html
• www.finaid.org/calculators/