Federal Student Loan Consolidation

Everything You Need to Know about Student Loan Consolidation

In a nutshell, loan consolidation refers to combining various parent or student loans into a single loan that can be obtained from a lender. Like mortgage refinancing, this consolidated loan is bigger and will be used to pay off all of the other existing loans. Several lenders also provide private student loan consolidation services.

However, the majority of FFELP lenders out there do not provide consolidation loans anymore because they aren't profitable anymore, either. Fortunately, the option to consolidate student loans will still be available at loanconsolidation.ed.gov, regardless of whether the student's college participates in Direct Loan programs or not.

The Interest Rates

When it comes to a student loan consolidation, the interest rate would be the mean of the consolidated loans' interest rates, rounded up to whichever eighth of one percent is closest.

So, if a student unsubsidized his Stafford Loans from July 2006, his interest rate should be fixed at 6.8%. When consolidated alone, however, the student loan consolidation will end up with a 6.875% interest rate. This means that his overall interest rate won't really increase too much.

However, if the student has several loans with various interest rates, his mean will lie somewhere in-between his original interest rates. If he has a Perkins Loan worth $10,000 at 5%, for instance, and an unsubsidized Stafford Loan of $20,000 at 6.8%, his mean will be 6.2%. This mean will then be rounded up to whichever one eight of one percent is closest, ending in a 6.25% interest rate for his overall student consolidation loan.

As you can see, the mean doesn't actually change the loan's underlying cost. Instead, it merely preserves the structure of the cost by adding each interest rate and applying it to parts of the entire loan balance. The previously shown student loan consolidation, for instance, states that $10,000 from the overall loan balance will stand at 5% while $20,000 of it will stand at 6.8%, thus yielding an overall total of 6.2% in interest rates.

So, if you want to consolidate student loans that have various interest rates, you should be prepared to pay an interest rate that is midway between the loans. Now, don't let anybody fool you by suggesting that you can save money with a lower rate. Think about it: even if the interest is lower than the highest interest rate that you have at the moment, it will still be higher than the lowest interest rate that you have at the moment, right? So, what you should focus on instead is how much interest you will actually pay over the loan's lifetime.

PLUS loans are an exception, though, since they have an interest rate loophole that can lower your fixed 8.5% interest rate by 0.25% if you opt for a student loan consolidation.

On another note, if you defer your unsubsidized Stafford Loan's interest through capital, the majority of lenders out there will add this capitalized interest onto your principal after the consolidation. (Lenders are allowed to capitalize interest quarterly, but the majority of them will only capitalize after certain changes occur in the loan statuses or if the loans become part of a repayment scheme.)

Consolidation is Free

Aside from the small interest rate increase that you will have to pay for during your student loan consolidation, you really won't have to pay for anything else - remember that.

In other words, you don't have to pay any fees in advance when it comes to your loan consolidation. Again: there shouldn't be any fees. Although several education loans, like PLUS and Stafford loans, might charge fees, they will usually be taken from your disbursement check and won't be taken upfront. So, if anybody asks you for an upfront fee, then you can be sure it's a scam.

Can You Consolidate?

Both parents and students are allowed to consolidate student loans. (However, parents and students aren't allowed to combine their individual loans by consolidating them. They can only consolidate the loans if the borrower of the loans is the same person. Their loans can be consolidated separately, though.)

Ever since July 2006, married students can no longer combine their loans in a student loan consolidation, either. If you are married students who both have individual loans, you will each have to bear responsibility for your own full loan amount. This provision exists to avoid issues in the near and distant future.

Additionally, students are only allowed to consolidate student loans after their loans enter a repayment scheme or after their grace period. (Default loans that have satisfactory arrangements for repayment can be consolidated, too.) Students aren't allowed to consolidate if they're still studying, but parents can consolidate their PLUS loans anytime.

Which Lender Should You Choose?

Parents and students can choose to consolidate student loans with the lender of their choosing, even if the loans are all with one lender. (The rule on single holders was repealed in June 2006, so borrowers don't have to exploit the rule loopholes of single holders anymore just to do their consolidation with a certain lender.) You can consolidate direct loans with the lender of your choosing, as well. This means that you can look around for as long as you want in order to find great discounts and the best rates available for you.

The majority of lenders out there will ask you for a minimum amount prior to consolidating student loans. Some lenders might not provide consolidation loans to people with loan balances under $7,500, for instance, while others will only provide consolidation loans to those with balances exceeding $5,000. The government's program for direct consolidation loans doesn't have a minimum balance, though. (Lenders aren't allowed to discriminate against any borrowers who are looking for student loan consolidation based on the type and number of loans that they want, the category and type of learning institution they were in, the kind of repayment schedule they want, or their loan's interest rate. However, they can discriminate based on how many loans need to be consolidated, which is why they can choose ask for a minimum loan balance if they want.)

Can You Consolidate Any Loan?

Yes, you can consolidate any federal student loan. If you want, you can consolidate an individual loan, too. However, there are several limitations when it comes to consolidating consolidation loans and these limitations have been around since 2006.

For one, consolidation loans can only be consolidated once. If you want to reconsolidate existing ones, then you will have to add new loans that haven't been added to them yet. You can consolidate two consolidated loans, too. However, you can't consolidate an individual consolidation loan on its own.

These new limitations on consolidating consolidated loans will definitely limit your chances of using student loan consolidation to change lenders. In general, you will have to consolidate your student loans once after they enter their repayment scheme or near the end of their grace period, and then stick with a lender until the loan is over. So, if you would like to have the chance to consolidate later on to change lenders, you will have to exclude a loan from your current consolidation for now.

Do keep in mind that reconsolidating a student loan consolidation doesn't reset that loans' rate. It will still be treated with a fixed interest rate or calculated the same way as earlier - remember that.

The Repayment Plans

Student loan consolidation will give you access to different repayment plans, aside from the regular 10-year repayment. There are extended repayment plans, graduated repayment plans, income-sensitive plans for FFEL loans and income-contingent plans for direct loans, to name a few. If you fail to specify which repayment terms you want, though, you will automatically get the 10-year one.

Student loan consolidation will usually lower the amount that you have to pay per month by extending the loan's term past the regular ten years of the original plan. So, depending on how much your loan is, you can extend its term to up to thirty years to make your monthly payments much more affordable and more tolerable. However, you will have to remember that extending the loan's term will also translate to a higher amount of paid interest over the loan's lifetime in the long run.

You don't have to choose a different repayment plan if you don't want to, though. In fact, it would be highly advisable to stick to the regular 10-year plan since you will end up saving a lot of money that way. Again: the other repayment plans might have lower payments every month, but your total paid interest in the long run will be much higher.

There might also be some circumstances where the student loan consolidation will reduce the monthly payments and extend the loan's term past ten years, too, though - if you repay a loan earlier than expected, for instance. This will then extend the shorter-term loan to ten years and the total paid interest will rise unless you keep paying the same amount every month, wherein your total paid interest amount will drop.

Your loan's repayment will start after 60 days of its disbursement, unless you qualify for a forbearance or a deferment.

Federal student loans - even the consolidated ones - don't have any prepayment penalties. This means that you can pay for some or all of your student loans early without being penalized for it. To take full advantage of this, make sure you write a letter stating that it should lower your principal and attach the extra payments to it. If you don't do this, your lender might think it's an advanced payment for the following month - remember that.

How to Evaluate Your Student Loan Consolidation Options

Despite the sudden change to fixed rates of interest on PLUS and Stafford loans, there are also other reasons why you should consolidate your student loans, such as only having one payment to worry about per month, having various repayment choices, and taking advantage of the PLUS loan loophole. However, student loan consolidation can reduce its grace period despite the loophole for it. Also, it would be best to simply avoid Perkins loan consolidation since doing so could increase the amount of interest that you have to pay over the loan's lifetime. Also, make sure you stick to the regular 10-year repayment plan.

Before you consolidate student loans, make sure you evaluate all of the benefits that your current loan holder gives you. After all, the student loan discounts that the original lenders gave you happen to be much better compared to the ones that you will get from consolidating lenders. This is due to the fact that consolidation loans come with tighter margins overall. Also, if you got a rebate or a fee waiver from your original lender, you might have to pay it back if you choose to consolidate with somebody else. If you don't want to consolidate, but want to use alternate repayment schemes, then you might be able to do so, too. There are graduated and extended repayment plans with 25-year terms and single payments per month, for example - provided your accumulated student loan debt with a lender is higher than $30,000.

You can also make changes to your loan's repayment schedule once a year, so start off with a regular 10-year plan first instead of going with an extended repayment plan right from the start. If you have trouble making these payments, then you can start thinking about switching to another plan.

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