Loan consolidation and Federal Consolidation Program
"Loan consolidation and Federal Consolidation Program" submitted by SchoolGrantsfor Editorial Team and last updated on Sunday 8th January 2012
Finally, if you are currently delinquent or in default on your Federal student loan, loan consolidation will cure your delinquency or default status. Why? Because a consolidation loan pays off the balance on those loans. Consolidation does not postpone payments, but does reduce them, making them more affordable. In consolidation, interest is paid as part of each monthly payment.
The Federal Consolidation Loan Program allows you to combine all eligible federal loans into a single new loan with one lower monthly payment over an extended repayment period. Because the monthly payment amount is reduced and the repayment period is extended, the total amount you repay will be greater than under the Standard Repayment Schedule. However, you can always prepay your consolidation loan at any time without penalty; thereby saving on additional interest costs.
Also referred to as Loan Consolidation, the process under which you combine your federal student loans [for example, Federal Stafford, Unsubsidized Federal Stafford, FISL, Federal Perkins (NDSL), Nursing Student Loans (NSL), Federal SLS, HPSL, Federal PLUS (under certain conditions)] into one loan from a single lender. The repayment period may be extended (depending on the amount borrowed) and the interest rate may increase.
See if loan consolidation makes sense. If you have several federal student loans, you may want to ask your lender about consolidating them into a single new loan with a new interest rate and an extended repayment term of up to 30 years. Loan consolidation isn’t right for everyone. Loan consolidation enables you to combine all of your student loans into one loan. Essentially, your current student loans are paid off and a new loan is originated with the combined balance. Consolidating your student loans has several advantages.
Advantages of Consolidation
- Monthly payment is reduced by up to 53% depending on loan balance
- Single-billing convenience - no worries about keeping track of different loan payments
- Specialized benefits, such as discounted interest rates for on-time payments*
- No fees, credit check, or prepayment penalty
- Repayment Flexibility
- Fixed interest rate
- Benefits vary. Be sure to check with your consolidating lender for availability.
- Extended and income sensitive repayment plans
- Lower monthly payments based on extended repayment and low fixed interest
- One check to write
- One lender to work with
If you are currently in your grace period, do not wait to consolidate. You're interest rate on your Stafford loans is lower during grace than in repayment. Consolidating as soon as possible will ensure you lock in the lowest possible rate for your loans.
Of course, we're sure you'd like to hear about disadvantages, but in our opinion there are none.
Following is a list of eligible student loans. If you have alternative or private education loans or credit card debt, you will not be able to consolidate those debts with your eligible education loans.
Loans that are eligible for inclusion in the Federal Consolidation Program:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- All Federal Direct Student Loans (Direct Loans)
- Federal Parent Loans for Undergraduate Students (PLUS)
- Federal Perkins Loans
- Health Professions Student Loans
- Health Education Assistance Loans (HEAL)
- Nursing Student Loans
- Federal Supplemental Loans for Students (SLS)
- Auxilliary Loans to Assist Students (ALAS)
- National Direct Student Loans (NDSL)
- Federally Insured Student Laons (FISL)
- Federal Consolidation Loans
When can I consolidate my loans?
For both FFEL and Direct Loans you can consolidate:
- During your grace period.
- Once you’ve entered repayment (the day after the end of the six-month grace period).
- During periods of deferment or forbearance.
What’s the interest rate on a consolidation loan?
The interest rate for both Direct and FFEL Consolidation Loans is a fixed rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on all of the loans you consolidate, rounded up to the nearest one-eighth of 1 percent. The interest rate will never exceed 8.25%.
Disadvantages of Consolidation
There could be also disadvantages of consolidation. For example, consolidation may significantly increase the total cost of repaying your loans. Because you may have a longer period of time to repay, you’ll pay more interest. If you received certain borrower benefits on a loan, such as interest discounts or rebates, those benefits may be lost if you consolidate the loan. Also, as noted earlier, cancellation benefits on a Perkins Loan are lost if the loan is consolidated. Disadvantages:
- Increased interest due to extended repayment
- Possible loss of some deferment and forbearance benefits
- You can combat excessive interest by increasing payments once you become established in your career. There is no prepayment penalty.
With a consolidation loan:
- Your monthly payment might be lower.
- Your repayment period may be extended (up to 30 years, depending on the amount of your consolidation loan and your other student loan debt).
- Compare the cost of repaying your unconsolidated loans with the cost of repaying a consolidation loan. Things to consider are:
- Whether you’ll lose any borrower benefits if you consolidate, such as interest rate discounts or principal* rebates, as these benefits can significantly reduce the cost of repaying your loans.
- If you include a Perkins Loan in your consolidation loan, you will lose cancellation benefits that are only available in the Perkins Loan Program.
- Carefully review your consolidation options before you apply. Talk to the holder of your loan(s) for more information before you consolidate.
- If you’re in default on a federal student loan, you still might be able to consolidate if you make satisfactory repayment arrangements on the defaulted loan or agree to repay the consolidation loan under the Income-Contingent, Income- Sensitive, or Income-Based Repayment Plans, provided the defaulted loan is not subject to a judgment or wage garnishment.
Help to decide if consolidation is the right option for you
This chart lists the features of loan consolidation, along with some considerations to help you decide if consolidation is the right option for you:
|One lender holds the loan.||You’ll always know whom to contact. You receive only one bill.||Other lenders may offer better deals, repayment incentives and other benefits.|
|A fixed interest rate.||If you consolidate variable interest rate loans, you’ll lock in a low interest rate. If rates rise, you’ll save money.||If interest rates fall in the future, you’ll be locked into a higher rate.|
|Separate federal student loans are combined into one loan.||Only one payment to make every month. Subsidized Federal Family Education Loan (FFEL) and Direct loans retain their interest subsidy benefits during deferment.||Non-federal loans, such as college or private alternative loans, cannot be included. Possible loss or change in benefits. Previous loans will be combined into one new loan with a new set of benefits that may include different deferment and forbearance options. Check with your lender and compare.|
|No fees, credit check or prepayment penalties.||As long as you meet the lender’s requirements for consolidation, you’ll be approved. You may pay off the loan at any time without penalty.||Some lenders require a minimum loan balance to apply.|
|An extended repayment period from 10 to 30 years, depending on your total debt.||Usually, a lower monthly payment.||Typically, a significantly higher payback. An extended repayment period means paying more interest over the life of the loan.|
|Four repayment plan options: standard, graduated, income sensitive or extended.||You can choose the repayment plan that best fits into your financial situation or future plans. Same repayment plans as those offered under Program, but with the option of an extended repayment term.||Minimal reduction in the principal amount owed. Increase in total loan costs.|
|Federal Perkins (ndsl) loans can be included in a Consolidation loan.||Combining your Perkins loan in your Consolidation loan means one less bill to remember to pay each month. The Perkins loan’s low interest rate (5%) will be included in the weighted average interest rate calculation and may influence the Consolidation loan interest rate.||You’ll lose the interest subsidy benefit on your Perkins loan. You’ll lose the Perkins deferment options. Perkins loans that are consolidated are no longer eligible for cancellation benefits, including those for teaching, public or military service. These loans consolidate as unsubsidized loans.|
|Delinquent or defaulted borrowers allowed to re-enter repayment.||Rebuild negative credit history and re-establish Title IV aid eligibility. May continue to take out new loans.||Borrowers who wish to consolidate are required to make three consecutive, voluntary, on-time, full monthly payments or agree to repay their new Consolidation loan under the income-sensitive repayment plan.|
How do I get a consolidation loan and where can I get more information?
- FFEL Consolidation Loan—Contact the consolidation department of a participating lender for an application and more information. You may consolidate your loans with any eligible consolidation lender in the FFEL program.
- Direct Consolidation Loan—Contact the Direct Loan Consolidation Department at 1-800-557-7392, or go to http://www.loanconsolidation.ed.gov/ TTY users may call 1-800-557-7395.
- Different Types of Student Loans or Grants After You Graduate
- Federal Stafford Loans and Grants
- Differences between Direct lending and the FFEL Program related to default prevention
- Federal Loan Limits For Dependent and Independent Student
- Dependent vs. Independent Student? Determine Dependency Status For Federal Student Aid
- Federal Student Loans vs. Private Loans
- Before you search for the best student loan
- Stafford Loan Limits