Federal Loan Consolidation

What is Federal Loan Consolidation?

Federal Loan Consolidation is the process of taking out a new loan to pay off all your existing federal education loans. Federal Loan Consolidation does not include any private educational loans or SELF Loans that you may have borrowed. The new loan has new terms associated with it. Currently, under the Federal Consolidation Loan (FCL) program, the loan has a fixed interest rate which is calculated as the weighted average of the current interest rates of the loans being consolidated, rounded up to the nearest 1/8%.

How do I qualify for a Federal Direct Consolidation Loan?

You must have at least one Direct or Federal Family Education Loan Program (FFELP) loan that is in grace, forbearance or default status. Students cannot concolidate while they are still enrolled in school at least half-time. Students cannot consolidate private educational loans into their Federal Direct Consolidation Loan.

If I decide to borrow a Federal Consolidation Loan, which lender should I choose?

You may check with any lender to see if they particpate in Federal Loan Consolidation. You can consolidate your loans under the Federal Direct Loan Program and combine all of your outstanding federal loans into a new combined loan. This consolidated loan will have new terms, such as the interest rate and length of repayment, but will also retain some of the benefits you had under the other loans, such as deferment of payment if you pursue additional education. With a Federal Direct Consolidation Loan, you have one loan payment per month. You may end up paying more interest than you would under the terms of your individual loans, so you do have to consider the cost of the consolidation loan versus the convenience of the single payment. However, as with all federal loan programs, there is no penalty for pre-payment which allows you to reduce the total accrued interest by paying more than the minimum monthly payment. You should compare your options and see what makes the most sense for you.

What are the advantages and disadvantages of consolidating?

Advantages

• Borrowers with multiple lenders can consolidate to deal with only one lender.
• Lower monthly payment achieved by extending payment period from the standard 10 years   to 15-30 years, depending on your loan balance
• Fixed interest rate

Disadvantages

• Increases the total cost of your debt – because borrowers are scheduled to pay the loan off over a longer period of time, you will pay more in interest over a longer period of time
• Loss of “forgiveness” options
  • Perkins Loan cancellation benefits no longer available if Perkins Loan included in consolidation
  • Stafford Loan forgiveness benefits for teachers not available under consolidation

What else do I need to know about consolidation?

• The Subsidized Stafford portion of a FCL retains the interest subsidy during deferment periods even if consolidated with Unsubsidized Stafford Loans.You may add to any outstanding consolidation loan any eligible loans received before or after the date of the consolidation, provided that you make the request within 180 days of the date the consolidation loan is made. After that point, a loan may not be added, however, you can obtain a second consolidation loan if you have one or more outstanding loan(s) eligible for consolidation.
• If you decide to consolidate, you must make sure you make all of your individual loan payments until your consolidation loan is complete. Your loans must not be in delinquent status when trying to consolidate. Any payments you make to a current loan holder after the loan has been paid in full by consolidation, would be forwarded to your consolidation lender.
• You may consolidate if you have loans from multiple lenders or loans from a single lender. However, before you look at a consolidation loan you should consider why you would want to consolidate your loans. If you are seeking a lower monthly payment or a longer repayment term, those options may be available to you under the terms of your current federal loans. Inquire about the various repayment options before decising to consolidate your federal  loans.
• The interest rates on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded to the nearest 1/8 of a percent and capped at 8.25%.
• If you don't remember who your lender is the best place to check on your loan borrowing is the National Student Loan Database System (NSLDS).