Consolidate your loans

What is consolidation?

Consolidation means refinancing one or more education loans. The original loans are paid in full, and you then have a new loan with new terms and conditions for the combined balance. The term “consolidation” is usually synonymous with federal consolidation, although there are private consolidations loans. For example, private consolidation loans are offered by Citibank and Sallie Mae.

Federal consolidation means combining multiple eligible federal student loans with various repayment schedules into a new federal loan with a single monthly payment. With a federal consolidation loan, you…

• Centralize your payments into one check a month
• Simplify loan communication requirements
• Gain financial flexibility through your choice of repayment plan
• May be able to extend your loan repayment period
• May reduce your monthly payment

Remember – if you take longer to repay your loan, you’ll pay more interest over the life of the loan. The shorter your repayment period, the lower your total interest payment.

Types of federal consolidation loans

There is Direct Loan consolidation and Federal Family Education Loan (FFEL) consolidation. Not all borrowers with federal loans are eligible for both Direct Loan and FFEL consolidation. The best advice is to check with your loan servicers to find out what consolidation options are available to you. There are some differences between Direct Loan and FFEL consolidation, such as:

• Minimum balance or number of loans required to apply
• Types of loans that may be consolidated
• Whether a prior account relationship is required
• Availability of repayment incentive benefits
• Availability of an electronic debit option
• Types of repayment plans offered

When you can consolidate

• During your grace period
• Once you enter repayment
• During deferment or forbearance

Note: Effective July 1, 2006, there is no in-school consolidation or option to accelerate loans into repayment status for the purpose of consolidating them.

Interest rates for federal consolidation loans

• Fixed interest rate
• Weighted average of the interest rates of the loans consolidated, adjusted up to the nearest 0.125% and capped at 8.25%

Repayment terms

In most cases, you may choose to repay through one of four repayment plans. Most borrowers may change repayment plans at any time and there’s no limit to the number of times you may change plans.

• Standard repayment – This plan gives you the option to pay less total interest than other plans because the repayment period is shorter.
  
  
  • Fixed payments of at least $50 a month for up to 10 years.
  • Payments toward both the interest and the principal balance.
• Extended repayment –This plan gives you lower monthly payments than standard repayment.
  
  
  • Fixed payments of at least $50 a month over a period that varies from 12 to 30 years, depending on the total amount of your consolidation loan and other allowable education loans.
  • Your education loans that aren’t consolidated may be considered when calculating the length of your repayment; however, they may not exceed the amount of the Direct Consolidation Loan.
  • If you have a small loan balance you may repay in less than 10 years.
• Graduated repayment – This plan may work for you if you’re just starting your career and expect your income to increase steadily over time.
  
  
  • Payments start out low and then increase, generally every two years over a period of 12 to 30 years depending on the total amount of your consolidation loan and other allowable education loans.
  • In the first two years, you’re making interest-only payments. Beginning in the third year you pay interest and principal.
  • Your monthly payment will never increase more than 1.5 times what you would pay under the standard repayment.
  • Your education loans that aren’t consolidated may be considered when calculating the length of your repayment; however, they many not exceed the amount of the Direct Consolidation Loan.
• Income-contingent repayment –This plan gives you the flexibility to meet your obligations without causing you financial hardship.
  
  
  • Monthly payments calculated on basis of your annual income and total amount of your Direct Loans. If you’re married, your spouse’s income and Direct Loan amounts are considered as well.
  • Maximum repayment period is up to 25 years.
  • If you haven’t fully repaid your loans after 25 years under this plan, the unpaid portion is discharged: however, you will have to pay taxes on the amount that is discharged.

What to consider when consolidating

• Review your goal(s) for consolidation. Are you consolidating for affordability? Flexibility? Convenience? Are there other options you should consider that meet your goal(s)?
• Find out which loans are eligible and which you plan to consolidate. You may want to consolidate some loans but not others.
• Evaluate the impact of combining high-interest and low-interest loans in consolidation, as your consolidation interest rate will be the weighted average rate of the loans.
• Are you are struggling to make ends meet? If so will consolidation free up some money that can be put to better use, such as paying off higher-interest debt such as credit cards?
• If you’re concerned about your loans being sold, check if the consolidator has sold its loans in the past. If so, they’re more likely to sell your loan. If you consolidate under the Direct Loan program, this isn’t an issue as the federal government does not sell loans.
• Is there a minimum or maximum balance to the amount you can consolidate?
• Are there any application fees?
• Will a credit check be done when you apply for consolidation? If so, will you be able to pass?
• What are the repayment options? Are there deferment, forbearance or prepayment options?
• What is the maximum payback period?
• Will the repayment option you chose under consolidation significantly increase the total cost of repaying your loans? If so, how much?
• Will you lose any borrower benefits by consolidating? If so, what’s the impact of losing these benefits? For example, Perkins Loans are eligible for additional cancellation benefits, such as performing certain kinds of public service. This benefit is lost when a Perkins Loan is included in a Direct Consolidation Loan. Another example is that borrowers who consolidate loans that are in grace lose any remaining grace period.

More information

U.S. Department of Education loan consolidation

Student Loan Network