Student Loan Consolidation
Consolidation Loans combine several student or parent loans in to six bigger loan from a single lender, which is then used to pay off the balances on the other loans. it is very similar to refinancing a mortgage. Consolidation loans are obtainable for most federal loans, including FFELP (Stafford, PLUS & SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans & Direct loans. Some lenders offer private consolidation loans for private education loans as well.
Most FFELP lenders are no longer offering consolidation loans because these loans are no longer profitable. Students can still consolidate their loans with the US Department of Education's Federal Direct Loan Consolidation program at loanconsolidation.ed.gov even if their college does not participate in the Direct Loan Program.
A separate page provides a comparison chart of consolidation loan discounts.
The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent & capped at 8.25%.
Interest Rates
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%) & $10,000 of unsubsidized Stafford Loans (at 6.8%), the weighted average is
For example, suppose a student has unsubsidized 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 & 7/8ths of a percent, or 6.875%. So the interest rate increases only slightly.
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%.
$5,000 * 5.0% + $10,000 * 6.8%
------------------------------ = 6.2%
$5,000 + $10,000
Note that the weighted average does not fundamentally adjust the underlying cost of the loan. It preserves the cost structure by including each interest rate to the extent that it applies to part of the overall loan balance. For example, the consolidation loan in the previous paragraph says that of the $15,000 consolidation loan balance, $5,000 will be at 5.0% & $10,000 at 6.8%, yielding an equivalent interest rate of 6.2%.
If you're consolidating loans with different interest rates, the weighted average interest rate will always be in between. Don't be fooled if somebody tries to suggest that this will save you money by getting you a lower interest rate. The interest rate may be lower than the highest of your interest rates, but it is also higher than the lowest of your interest rates. More importantly, the amount of interest you pay over the lifetime of the loan will be about the same.
The PLUS loan interest rate loophole can reduce the interest rate on 8.5% fixed rate PLUS loans by 0.25% through consolidation.
(For the mathematically inclined, there is a slight difference due to the different shapes of amortization curves at each interest rate. In the example given above on a 10 year term, $10,000 at 6.8% has a monthly payment of $115.08 & total interest paid of $3,809.66, $5,000 at 5.0% has a monthly payment of $53.03 & total interest paid of $1,364.03. If you add these, you receive a total monthly payment of $168.11 also a total interest paid of $5,173.69. Using the weighted average, $15,000 at 6.2% has a monthly payment of $168.04 also a total interest paid of $5,165.01. So using a weighted average yields a very small reduction in the monthly payment (in this case, 7 cents) & in the total interest paid ($8.68) due to a kind of triangle law. Of coursework, when you consolidate the interest rate is rounded up to the nearest 1/8th of a point, so $15,000 at 6.25% has monthly payments of $168.42 & total interest of $5,210.42, yielding a slight increase. So you pay a tiny bit of a premium for consolidation, due to the rounding up of the interest rate.
If you were deferring the interest on an unsubsidized Stafford Loan by capitalizing it, most lenders will add the capitalized interest to principal when you consolidate. (Lenders can capitalize interest at most quarterly, but most capitalize it two times when the loans enter repayment or at other loan status changes.)
No Cost to Consolidate
Under no circumstances pay a fee in advance to receive a federal education loan or consolidate your federal education loans. there's no fees to consolidate your loans. While other federal education loans, such as the Stafford & PLUS loans, may charge some fees, the fees are always deducted from the disbursement check. There is never an up front fee. If somebody wants you to pay an up front fee, chances are that it is an example of an advance fee loan scam.
Aside from a slight increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. there's no fees to consolidate.
Both student & parent borrowers can consolidate their education loans. (Students & parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)
Who Can Consolidate
Married students are no longer able to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible for the full amount of the loan, & the loans couldn't be separated if the couple got divorced. To avoid such problems in the future, Congress decided to repeal this provision as part of the Higher Education Reconciliation Act of 2005.
Students can only consolidate their education loans during the grace period or after the loans enter repayment. (Loans that are in default but with satisfactory repayment arrangements may also be consolidated.) Students can no longer consolidate while they are still in school. (The early repayment status loophole & the ability of Direct Loan borrowers to consolidate during the in-school period was repealed as part of the Higher Education Reconciliation Act of 2005, effective July 1, 2006.)
Parents, however, can consolidate PLUS loans at any time.
You Can Consolidate with Any Lender
Most lenders need a maximum balance before they will consolidate your loans. For example, lots of lenders will only offer consolidation loans for borrowers with loan balances of at least $7,500. A few lenders will offer consolidation loans for balances of $5,000 or more, & the Federal Direct Consolidation Loan program has no maximum balance for consolidation loans. (Lenders may not discriminate against borrowers who seek consolidation loans on the basis of number/type of student loans, type/category of educational institution, the interest rate on the loans, or the type of repayment schedule sought by the borrower. Lenders are, however, able to discriminate on the basis of the amount of the loans being consolidated, so lenders can set a maximum balance on the loans.)
Students & parents can consolidate their loans with any lender, even if all of their loans are with a single lender. (The single holder rule was repealed on June 15, 2006, as part of the Emergency Supplemental Appropriations Act of 2006. Borrowers no longer need to exploit the single holder rule loopholes in order to consolidate with any lender.) Direct Loans can also be consolidated with any lender. This allows you to shop around for a lender that offers a lower rate or better discounts.
Which Loans Can be Consolidated?
Any federal education loan can be consolidated. You can even consolidate a single loan. there's, however, a few restrictions on consolidating a consolidation loan.
You can consolidate a consolidation loan only two times. In order to reconsolidate an existing consolidation loan, you must add loans that were not previously consolidated to the consolidation loan. You can also consolidate six consolidation loans together. But you cannot consolidate a single consolidation loan by itself. These restrictions have been in effect since early 2006.
Note that when you reconsolidate a consolidation loan, it does not relock the rates on the consolidation loan. The consolidation loan is treated as a fixed rate loan within the weighted average interest rate formula used to calculate the interest rate on the new consolidation loan. Consolidation does not pierce the veil on previous consolidations.
The new restrictions on consolidating a consolidation loan limit your ability to use consolidation to switch lenders. Generally, you will consolidate your loans two times, toward the end of the grace period or after the loans enter repayment, & then be locked in to that lender for the lifetime of the loan. If you require to preserve your ability to use consolidation in the future to switch lenders, you should exclude six of your loans from the consolidation.
Repayment Plans
Consolidation loans provide access to several alternate repayment designs besides standard ten-year repayment. These include extended repayment, graduated repayment, income contingent repayment (Direct Loans only) & income sensitive repayment (FFEL only). If you do not specify the repayment terms, you will get standard ten-year repayment.
Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that's standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased.
You do not need to pick an alternate repayment plan. they recommend sticking with standard ten-year repayment, because it will save you money. The alternate repayment designs may have lower monthly payments, but this increases the term of the loan & the total interest paid over the lifetime of the loan. See our caveat about extended repayment below.
In certain circumstances (for example, when six or more of the loans was being repaid in less than 10 years because of maximum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total amount of interest paid will decrease.
Repayment on a consolidation loan will begin within 60 days of disbursement of the loan, unless the borrower qualifies for an deferment or forbearance.
Federal education loans, including consolidation loans, do not have a prepayment penalty. So you can pay off all or part of your federal education loans without incurring a penalty. If you require to take advantage of this, be sure to include a letter with the extra payment indicating that it should be applied to reducing your principal. Otherwise, the lender may treat it as an advance payment of the next month's monthly payment.
Tools for Evaluating Consolidation Options
FinAid's Loan Consolidation Calculator can help you understand the tradeoffs of consolidating your loans. It compares the reduction in the monthly loan payment with the increase in the total interest paid over the lifetime of the loan. It also shows you the interest rate on your consolidation loan.
Before consolidating, always evaluate the benefits provided by the current holder of your loans. The loan discounts offered by originating lenders tend to be superior to those offered by consolidating lenders, since consolidation loans have tighter margins. Also, if you received a fee waiver or rebate from the originating lender, you may have to repay that discount if you consolidate with another lender. It may be possible to get some of the benefits of alternate repayment designs without consolidating, such as extended/graduated repayment with a loan term of up to 25 years also a single monthly payment, if you have over $30,000 in federal education loan debt accumulated since October 7, 1998 with the lender. (This is due to a little known provision of the Higher Education Act, in section 428(b)(9)(A)(iv), & the regulations at 34 CFR 682.209(a)(6)(ix).)
Despite the switch to fixed interest rates on Stafford & PLUS loans eliminating a key financial incentive to consolidate, there's still several reasons to consolidate your education loans. These include having a single monthly payment, access to alternate repayment designs, the PLUS loan interest rate loophole, & the ability to reset the 3-year clock on deferments & forbearances. But consolidation can cut short the grace period, although the grace period loophole can work around this problem. it is best to avoid consolidating Perkins loans, because you lose several valuable benefits. Beware of extending the term of your loan, as this can increase the total interest paid over the lifetime of the loan; you can stick with standard ten-year repayment.
You can adapt the repayment schedule on your loan two times per year. So consider starting off with standard ten-year repayment on your consolidation loan. you're not required to start off with extended repayment. If you find it difficult to afford the payments, you can always switch to extended repayment later.
