Consolidation

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An overview of the Federal Consolidation Loan Program

Loan consolidation is an option that many student loan borrowers consider at some point over the life of their loans. While the reasons a borrower may choose to consolidate vary, many borrowers consolidate in order to:

Combine multiple loan balances under a single lender, so that the borrower has to make only one monthly payment, and
Lock in a fixed interest rate for the entire repayment period of the loan.

Remember, however, that a borrower is not required to consolidate his or her federal student loans. Consolidation is a decision that a borrower should not take lightly. This section will give you a general overview of the Federal Consolidation Loan Program and can serve as a helpful resource as you consider if consolidating your loans is right for you.

Types of loans that may be consolidated
A borrower seeking a Consolidation loan can consolidate several different types of federal education loans. The types of loans that you may include in a Consolidation loan are:

FFELP loans (Stafford, PLUS, SLS, and prior Consolidation loans)
FDLP loans (Stafford, PLUS, and prior Consolidation loans)
FISL loans
Perkins loans (formerly National Student Defense Loans)
Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS)
Nursing Student Loans (NSL)
Health Education Assistance Loans (HEAL)

Note: There may be disadvantages to including a Perkins loan in a Consolidation loan. See "Frequently asked questions about student loan consolidation" for more information.

When a borrower may consolidate
In order to qualify for a Federal Consolidation loan, you must be in your grace period or have entered repayment on each loan that is selected for consolidation.

How a Consolidation loan interest rate is calculated
The interest rate on a Consolidation loan is the weighted average of the interest rates (as of the date the application is received by the lender) on all of the loans you are consolidating, rounded up to the nearest one-eighth of a percent. For example, let's say that you have:

$20,000 in Stafford loans at a 6.8% interest rate
$10,000 in Perkins loans at a 5% interest rate

If you consolidate these loans, your Consolidation loan amount will be $30,000.

To calculate your Consolidation loan interest rate, multiply each loan's debt by its current interest rate, add those amounts together, and divide that sum by the total loan debt.

20,000 X 6.8% = 1360
10,000 X 5% = 500
1360 + 500 = 1860
1860/30,000 = 6.2%
Don't forget that the interest rate is rounded up to the nearest one-eighth of a percent, which will bring your Consolidation loan interest rate to 6.25%.

If you decide to consolidate, you should keep in mind that it is best to consolidate at a time and in a way that will be most advantageous for you, particularly with regard to the interest rates of the loans that you want to consolidate. Here are a few things to consider:

If you took out an unsubsidized Stafford or PLUS loan first disbursed on or after July 1, 2006, it carries a fixed interest rate of 6.8% or 8.5%, respectively.
However, if you took out a Stafford or PLUS loan first disbursed before July 1, 2006, it carries a variable interest rate that is adjusted annually on July 1 (and remains in effect through the following June 30). The new interest rates for variable-rate Stafford and PLUS loans are announced each year in late May, which gives you a chance to see if the rates will increase or decrease.

Note: Stafford loans that have variable interest rates actually have two levels of rates. The interest rate is lower when you are in school, in your grace period (the six months after you leave school before you have to start paying back your loans), and in periods of deferment. The interest rate is higher when you are in repayment. So, if you consolidate a variable-rate Stafford loan while you are in your grace period or while you are in a period of deferment, the interest rate on that loan can be up to 0.6% lower, which will have a positive effect on the calculation of your Consolidation loan interest rate.

Extending your repayment period: Lower monthly payments, more interest repaid over the life of the loan
With a Consolidation loan, the maximum length of your repayment period depends on the total balance of all of your education loans, regardless of whether you consolidate every loan. You may be allowed a repayment period that is anywhere from 10 years to 30 years. By choosing a longer timeframe, your monthly payment may be lower, but this choice may cause you to pay a significantly higher amount of interest on your loan over the additional years of repayment. [Examples are provided in "Lower payments, larger payout — is it worth it?"]

As with any other federal education loan, you can prepay your Consolidation loan at any time without penalty. It's always to your benefit to pay extra on your loan's principal whenever possible, because this will reduce the amount of interest you pay over the life of the loan. Contact your lender for more information about prepayment.

Selecting a lender or servicer
If you are considering consolidation, start by contacting the lender(s) or servicer(s) that holds your loans to discuss your options. It is important to remember that you can consolidate your federal education loans with any lender that participates in the Federal Consolidation Loan Program. In addition, a borrower who has a FFELP loan(s) may obtain a Federal Direct Consolidation loan for the purpose of obtaining certain benefits. These benefits include Public Service Loan Forgiveness and the no accrual of interest benefit for active duty service members. To learn more about loan consolidation under the FDLP, a borrower should contact the Department of Education.

Visit TG's Lender Fact Sheets for a list of consolidating lenders.