Student Loan Consolidation
The following information is provided only as a general summary of federal student loan consolidation programs and is subject to change based on the requirements of the respective consolidating lenders. It is not intended to be all inclusive. As such, it is in the borrower's best interest to contact consolidating lenders directly to obtain accurate, up-to-date program information.
Initially, a borrower should contact their student loan lender(s) to request information on loan consolidation programs they may offer. When investigating student loan consolidation programs, keep in mind that the reduced monthly payment achieved when the consolidating lender purchases a borrower's student loans and extends the length of the repayment period for the newly created consolidation loan will increase the borrower's cost.
Pros and Cons of Consolidation
- It will combine all of your debt into one loan with a fixed interest rate and one monthly payment.
- Most of the time, the consolidated interest rate and monthly payment will be lower than if you do not consolidate.
- Although you may lower your monthly payment, your loan terms may be extended upon consolidation.
- Your monthly payment is lower, but you will pay MORE overall. With longer terms, there is more time for interest to accrue, and the total amount you pay on the loan will be more.
Generally, borrowers may be eligible for Federal Family Educational Loan Program (FFELP) consolidation if they meet the following conditions:
- The borrower has student loans totaling more than $7500 with more than one lender and would like a repayment term that is longer than 10 years;
- If the borrower has delinquent or defaulted loans, satisfactory repayment arrangements have been made with the holder of the loans prior to consolidation;
- Married couples if they agree to each be responsible for the entire loan debt regardless of any change in their marital status (loans can be discharged due to death or disability only if both individuals are affected and qualify).
Loans eligible for consolidation include Federal Perkins Loans, Federal Nursing Loans, Federal Stafford Loans, Supplemental Loans for Students (SLS), and the student's PLUS Loans (the parent's PLUS Loans cannot be consolidated).
The length of the consolidation loan repayment schedule will vary from 10-30 years based on the amount of student loan debt and borrowers may have the option of choosing among several different repayment options. Examples of repayment options include: standard monthly payments; graduated repayment; and income-sensitive repayment.
The interest rate is usually the weighted average of the loans being consolidated, rounded up to the nearest whole percent, not to exceed 8.25%. There are usually no origination fees, service charges or early repayment penalties associated with the consolidation loans.
Borrowers may also have the option of consolidating their federal student loans through the Federal Direct Consolidation Loan even if the student has not borrowed through the Direct Loan program. Direct loan consolidation offers standard, extended, income-contingent and graduated repayment options. Borrowers loans may also be consolidated while still in an in-school status. Contact the Consolidation Department of the Direct Loan Servicing Center for more information at 1-800-557-7392 or on the internet at http://www.ed.gov/offices/OSFAP/DCS/index.html.
Standard Payment Plan
The consolidation loan amount is repaid in equal monthly payments over the maximum period allowed.
Income Sensitive Plan
The repayment amount is adjusted annually based on your total monthly income. Payments must cover at least the interest that accrues between scheduled payments. The maximum payment may never exceed three times the amount of any previously scheduled payment amount.
Payments start low and gradually increase during the repayment period.
NOTE: The total interest paid on the loan is higher through the income sensitive and graduate repayment plans than the standard repayment plan.
Generally, consolidation loans are eligible for the following deferments:
- Full-time Student
- Half-time Student
- Graduate Fellowship
- Rehabilitation Training
- Economic Hardship
The Federal government will pay the interest that accrues during one of these authorized deferment periods only on the loans included in the consolidation that are subsidized loans.
ried couples are eligible for deferments only if both parties meet the deferment requirements.
Federal Loan Consolidation Programs
Private Education Loan Consolidation Programs
IN-SCHOOL FEDERAL LOAN CONSOLIDATION OPTION
President Obama signed the Health Care and Education Reconciliation Act of 2010 (HCERA) on March 30, 2010. Title II of the HCERA, the SAFRA Act, made significant changes to the federal student loan programs including temporary changes to the conditions under which a borrower may consolidate loans into a Federal Direct Consolidation Loan. These changes apply only to a Direct Consolidation Loan that is made based on an application received by the U.S. Department of Education on or after July 1, 2010 and before July 1, 2011.
Borrower Eligibility Under the HCERA Temporary Consolidation Authority
If a borrower’s Consolidation Loan Application and Promissory Note is received by the U. S. Department of Education on or after July 1, 2010 and before July 1, 2011, the borrower may consolidate a loan that has not yet entered repayment status, including a loan that is in an in-school status, if the borrower meets the following requirements:
- The borrower has one or more loans from two or more of the following categories: (i) FFEL Program loans that are held by an eligible lender; (ii) FFEL Program loans that have been purchased by the Department (“PUT” Loans); and (iii) Direct Loan Program Loans.
- The borrower has not yet entered repayment on one or more of the loans in any of the categories in #1.
- The borrower is not consolidating any loans other than loans from the categories listed in #1.
Interest Rate Calculation for Loans made under the Temporary Consolidation Authority
For any Direct Consolidation Loan made to a borrower under the temporary consolidation authority, the interest rate will be calculated as follows:
- Unless the borrower is consolidating certain loans that have a variable interest rate (see below), the interest rate on the Direct Consolidation Loan is the lesser of (a) the weighted average of the interest rates on the loans being consolidated, or (b) 8.25% (that is, the interest rate is calculated in the same manner as the interest rate for a regular consolidation loan, but without the rounding up to the nearest higher one-eighth of one percent).
- If one or more of the loans a borrower consolidates is a Federal Stafford Loan (subsidized or unsubsidized), a Direct Subsidized Loan, or a Direct Unsubsidized Loan with a variable interest rate that is lower during the in-school, grace, and deferment periods, the interest rate on the Direct Consolidation Loan is the lesser of (a) the weighted average of the interest rates on the loans being consolidated, rounded to the nearest higher one-eighth of one percent, or (b) 8.25% (that is, the interest rate is calculated in the same manner as the interest rate for a regular consolidation loan).
Factors for Borrowers to Consider Before Consolidating
Because a Direct Consolidation Loan enters repayment on the date the loan is made, there are important factors a borrower needs to consider before deciding to consolidate loans into a Direct Consolidation Loan under this temporary authority.
Grace Period: There is no grace period on a Direct Consolidation Loan made under the temporary authority. If a borrower consolidates a loan that has a grace period while the borrower is still in school on at least a half-time basis and before the loan has entered the grace period, the borrower will not receive a grace period on that loan after the borrower ceases to be enrolled on at least a half-time basis. The borrower will, however, be eligible for an in-school deferment on the Direct Consolidation Loan while enrolled at least half-time at an eligible institution. If the borrower waits to consolidate until after the loan has entered the grace period, the borrower may delay the processing of the Direct Consolidation Loan application until the end of the grace period by completing Item 17 in section C1 of the Direct Consolidation Loan Application and Promissory Note. Borrowers who delay applying until their loans enter the grace period and whose application is received by the Department before the July 1, 2011 deadline may receive the modified interest rate associated with the temporary authority, provided that they are not consolidating certain variable interest rate loans, as explained above.
PLUS Loans: Borrowers with Federal PLUS Loans or Direct PLUS Loans that were first disbursed on or after July 1, 2008, are eligible to defer repayment of these loans for a 6-month period that begins on the date the borrower (or the dependent student on whose behalf the borrower obtained the loan) ceases to be enrolled at least half-time. Parent PLUS borrowers are also eligible to defer repayment while the dependent student is enrolled in school on at least a half-time basis. If a PLUS borrower consolidates one of these loans while the borrower (or the dependent student) is still enrolled in school at least half-time, or during the 6-month post-enrollment deferment period, the borrower will lose eligibility for these deferments.
If you have questions about the temporary Direct Consolidation loan authority discussed in this letter, please contact Pamela Moran at 202-502-7732 or at Pamela.Moran@ed.gov.