Student Consolidation Loans as a Last Resort

Consolidation Loans are typically a "last resort" option when the other repayment plans do not provide a monthly payment that fits into your budget. While there are some benefits to consolidation (like lower monthly payments and placing all of your loans with one lender), these loans also lead to higher interest costs and may adversely impact your deferment options. Most importantly, Consolidation Loans will negate any borrower benefits your lender or servicer may provide, such as a reduction in interest rates for on-time monthly payments. Therefore, you should carefully consider all repayment options before consolidating your loans.

You may receive the same benefits of consolidation by combining your loans with one lender. Combining your loans does not pay off your current loans with a new Consolidation Loan. Rather, each loan remains "active" but you make only one monthly payment and retain all deferment and borrower benefits of each loan.

Eligible Loans

The following federal education loans are eligible for consolidation into a Direct Consolidation Loan:

• Direct Subsidized and Unsubsidized Loans
• Federal Subsidized and Unsubsidized Federal Stafford Loans
• Direct PLUS Loans and Federal PLUS Loans **
• Direct Consolidation Loans and Federal Consolidation Loans
• Guaranteed Student Loans
• Federal Insured Student Loans
• Federal Supplemental Loans for Students
• Auxiliary Loans to Assist Students
• Federal Perkins Loans
• National Direct Student Loans
• National Defense Student Loans
• Health Education Assistance Loans
• Health Professions Student Loans
• Loans for Disadvantaged Students
• Nursing Student Loans

If you have defaulted student loans, you also may include them in your Consolidation Loan if you have made satisfactory repayment arrangements with the holder.

Ineligible Loans

Some loans are always ineligible for consolidation. While these loans may not be included in a Direct Consolidation Loan, they may be considered in the calculation of the maximum repayment period under the Graduated or Extended Repayment Plan. These include but are not limited to the following:

• Loans made by a state or private lender and not guaranteed by the federal government
• Primary Care Loans
• Law Access Loans
• Medical Assist Loans
• PLATO Loans

FFEL Consolidation Loans

A FFEL Consolidation Loan is designed to help student and parent borrowers consolidate several types of federal student loans with various repayment schedules into one loan. With a FFEL Consolidation Loan, you will make only one payment a month. Under this program, your consolidation loan will be made by a commercial lender, credit bureaus will be notified that your account has a zero balance, and you will sign a new promissory note that will establish a new interest rate and repayment schedule.

To receive a FFEL Consolidation Loan, you must be in repayment on your defaulted loan (that is, three voluntary, on-time, full monthly payments). Depending on the balance due, the repayment period may extend up to 30 years. If you owe no other delinquent or defaulted debts to the United States, you will again be eligible for other federal funds, including FHA loans, VA loans, and Title IV student financial aid funds. 

Interest Rate

Like new Stafford Loans, the maximum interest rate for Consolidation Loans is 8.25 percent. However, Consolidation Loan rates are fixed, rather than variable. Consolidation Loan rates are determined by taking the weighted average of the interest rates of all loans being consolidated and rounding the average up to the nearest 1/8th of a percent.

Terms and Conditions

Borrowers who want to consolidate through the FFEL Program must be in repayment or in a grace period preceding repayment. Borrowers wanting to consolidate using the Federal Direct Loan Program have the added option of consolidating while in school.

Pitfall: Consolidating your loans while still in school forces you to forfeit your six-month grace period. This results in immediate interest charges on any payments you make during the first six months of repayment. Without consolidation, any payments made on subsidized loans during the grace period are applied entirely to the principal balance of your loan.

If you arrange a Consolidation Loan, you have the option of a standard, graduated, or income-sensitive repayment schedule. Federal Direct Consolidation Loans also offer an income-contingent repayment option. Contact the Direct Loan servicer for more information on income-contingent repayment.

Maximum Repayment Periods

The repayment period for a Consolidation Loan is based on the amount of the Consolidation Loan plus the amount of your other education loans that do not qualify for consolidation. For purposes of determining your repayment terms, the sum of your other education loans may not exceed the amount of your Consolidation Loan and may not include defaulted education loans.

After your loans are consolidated, you have 180 days to add prior qualifying loans to the consolidation. If you receive eligible student loans after the date of a Consolidation Loan, you may receive another Consolidation Loan.

Peaks: Monthly payments are lowered through extended repayment periods ranging from 10 to 30 years. Consolidation creates a single loan with one lender and allows you to "lock-in" the current interest rate. (Also could be a pitfall if rates decline after consolidation.)

Pitfalls: Extended repayment periods will increase total interest costs. Consolidation Loans may offer fewer deferments than your current loans and you may lose lender-paid benefits or loan discharge privileges for any loans that you include in a Consolidation Loan.