Student Loan Consolidation

The Federal Consolidation Loan Program was established by Congress to help students manage federal student loan debt. Federal Consolidation Loans give borrowers (both students and parents) the opportunity to simplify repayment by combining federal loans into one convenient monthly payment. To qualify, borrowers must have at least two federal student loans. While most traditional student loans are paid in full over the course of a ten-year period, repayment terms on consolidation loans can extend from ten to thirty years, depending on the amount of the loan. The interest rate on a consolidation loan is a fixed rate for the entire term of the loan equal to the weighted average interest rates of the outstanding loans, rounded up to the nearest 1/8th percent, or 8.25 percent, whichever is less.

Furthermore, if loan consolidation is done during the loan “grace” period — typically the six months after graduation when borrowers are not required to begin repayment — the interest rate will be based on a weighted average of lower in-school interest rates. Since the first payment on a consolidation loan is due within 60 days of disbursement, borrowers who are in a grace period and want to maximize their deferment benefits should submit applications for loan consolidation as close to the end of their grace period as possible.

Once the consolidation loan is disbursed, borrowers may forfeit any time remaining in their grace period.

By law, lenders cannot charge fees or run credit checks to process student consolidation loans. Borrowers have a choice of several repayment schedules: standard payments are fixed monthly payments which extend over a set period of time; graduated payments start out low and increase every two years; income-sensitive payments are variable payment amounts based on annual income; and extended payments are available for large loans. Borrowers may change repayment plans at any time. Consolidation, however, is a one-time process. It cannot be done again unless there is a new loan to be included.

Obviously, the major benefits of loan consolidation are one lender, lower monthly payments, and a fixed interest rate. Students and parents should be aware that loan consolidation generally extends the repayment period and, in the long run, may result in increased finance charges over the lifetime of the loan. There are, however, no prepayment penalties on Federal Consolidation Loans, so interest costs can be reduced by paying off the loan early. Students should also take into account that Federal Consolidation Loans have fewer deferment, cancellation, and forgiveness options than some original student loans.

Students considering full-time graduate or professional school should investigate deferment options before entering into loan consolidation. While payments may be deferred during periods of school enrollment, interest will accumulate on the consolidation loan. Borrowers with loan balances of $30,000 or more may be able to extend the repayment period up to twenty-five years without consolidating.

Borrowers with Perkins Loans should carefully weigh the advantages and disadvantages of including these loans in a consolidation package, since Perkins Loans offer special benefits such as 100 percent cancellation for employment in certain fields and an interest subsidy. Borrowers forfeit these benefits once they enter into a consolidation loan. Also, because the interest rate on Perkins Loans is 5 percent, the inclusion of Perkins Loans in the consolidation loan may have a negative impact on the calculated average used to determine the interest rate on the consolidation loan.

Parents who obtained Federal Parent Loans for Undergraduate Students (PLUS) to help their children through their undergraduate years are also eligible to apply for Federal Consolidation Loans. Although rates are higher than those offered to student borrowers, parents can still obtain attractive fixed rates, depending on when the variable loan was disbursed. PLUS borrowers must pass a credit check as part of the consolidation process. Parent PLUS Loans cannot be consolidated with the dependent student’s loans.

The following loans that are eligible for consolidation through the Federal Consolidation Loan Program:

• Federal Stafford Loans, subsidized and unsubsidized, including Guaranteed Student Loans
• Federal Supplemental Loans for Students (SLS)
• Federal Perkins Loans (NDSL)
• Federal Direct Loans, subsidized and unsubsidized
• Health Professions Student Loans, including Loans for Disadvantaged Students (HPSL)
• Health Education Assistance Loans (HEAL)
• Federal Insured Student Loans (FISL)
• Federal PLUS (Parent) Loans
• Federal Nursing Student Loans (NSL)

In conclusion, loan consolidation can be a wise choice for borrowers who are struggling to meet their current loan payments. The lower monthly payments can give individuals flexibility to better manage current monthly expenses and loan debt. Borrowers should beware of the temptation to let loan payments drop so low that they are only paying interest and never tackling the principal. They should also consider the ramifications of extending educational debt over long periods of time. With twenty to thirty year repayment plans, individuals may still be repaying their own educational loans while trying to put their children through college. As salaries increase, most borrowers are advised to accelerate their educational loan payments.