Student Loan Consolidation

Student Loan Consolidation

Student Loan Consolidation, also called a Student Consolidation Loan, combines several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation loans are available for most federal loans, including FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans. Some lenders offer consolidation loans for private loans as well.

How It Works

Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. (10 years for less than $7,500; 12 years for $7,500 to $10,000; 15 years for $10,000 to $20,000; 20 years for $20,000 to $40,000; 25 years for $40,000 to $60,000; and 30 years for $60,000 and above.) The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid is increased.

In certain circumstances (for example, when one or more of the loans was being repaid in less than 10 years because of minimum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total amount of interest paid will decrease.

The interest rate on consolidation loans is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.

If a student consolidates their loans before they enter repayment, the interest rate used is the lower in-school interest rate. Thus, although the rounding up of the weighted average can potentially cost the student as much as 0.12%, a student who consolidates before entering repayment can save as much as 0.6%, a substantial net savings. (The in-school interest rate is 1.7% plus the 91-day treasury bill rate from the last auction in May. During repayment, the interest rate is the 91-day T-bill rate plus 2.3%.) This loophole has been confirmed by an excerpt from the Federal Register and direct correspondence with the US Department of Education. Additional details can be found in the interest rate loophole section.

Some graduate students have found it necessary to consolidate their educational loans when applying for a mortgage on a house.

To find out more about Student Loan Consolidation, check with your lender.

Alternatives

Consolidation simplifies the repayment process but does involve a slight increase in the interest rate. Students who are having trouble making their payments should consider some of the alternate repayment terms provided for federal loans. Income contingent payments, for example, are adjusted to compensate for a lower monthly income. Graduated repayment provides lower payments during the first two years after graduation. Extended repayment allows you to extend the term of the loan without consolidation. Although each of these options increases the total amount of interest paid, the increase is less than that caused by consolidation.