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Loan Consolidation
If you have outstanding balances on several different federal loans, you may be able to combine them into one new consolidated loan with one monthly repayment. This reduces the size of your monthly payments by extending your repayment period for 10 to 30 years, depending on your total debt.
Other loan consolidation programs are available from participating private or state lenders (such as banks, credit unions and savings and loan associations), guarantee agencies, the Student Loan Marketing Association and other secondary markets. Some consolidation plans allow you to base your repayment on your income. The interest rate on your new consolidated loan will be the weighted average of interest rates on loans you choose to consolidate, and will be fixed for the life of the loan.
Topics
1) What is Consolidation?
Consolidation is basically paying off one or more eligible loans by borrowing a new loan. Another way to think of this is the "refinancing" of a borrower's educational debt into a new federally guaranteed load.
2) Which Loans can be Consolidated?
Only federal educational loans can be included in the new consolidation loan. For most borrows this would include Stafford and Direct subsidized and unsubsidized loans and Perkins Loans. However, there are several other federal loans that can be included in the Direct Federal Consolidation Loan. These include health profession loans and other special federal loans.
Loans from the SELF Program may not be consolidated, but the outstanding balance on SELF Loans may be used to determine length of the repayment term for consolidation loans. Private, alternative and institutional loans also cannot be included in a Federal Consolidation Loan. Your student loans can be consolidated only once.
Private, alternative, and institutional loans can not be included in a Consolidation Loans as they are not "insured" or "guaranteed" by the federal government.
3) What are the Interest Rates of a Consolidation Loan?
The interest rate is variable, and is based on the weighted average of the consolidated loans not to exceed 8.25 percent.
4) Is there a minimum?
Although there is no federally mandated minimum, lenders do have the authority to establish their own minimums. Generally speaking a borrower must have a minimum of $10,000 in federal debt to obtain a consolidation loan (although some lenders have lower minimums).
5) Advantages of Consolidation
Consolidation loans allow borrowers to lock in low interest rates and extend their repayment period beyond that provided by the original loan. This results in lower monthly payments for the duration of the new consolidated loan. Plus, most deferment and forbearance options are not affected by loan consolidation. Cosolidation also allows borrowers to have a one single convenient monthly payment.
6) Disadvantages of Consolidation
Consolidation loans do not have a grace period, and payments begin shortly after the consolidation is finalized. You also will make more payments and pay more interest. This means the total cost of repaying the loan will be higher after consolidation even though your payment per month may decrease. Other borrower benefits resulting from the original loan also may be lost.
7) Understanding implications of loan consolidation
Be sure you understand the implications of loan consolidation. The following article
will help answer your basic questions:
Loan Consolidation: What's the big deal?
8) Additional Information
For more information, check with your lender or a financial aid administrator. Or visit www.loanconsolidation.ed.gov or contact the Loan Origination Center's Consolidation Department at (800) 557-7392.
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