Federal Loans: Consolidated Loans
Students often take out a number of federal loans over their school career. For some, the cumulative result of paying back all the loans at once may not be manageable. Federal Loan Consolidation allows students to consolidate all federal loans into one loan through the Federal Direct Loan Program (FDLP). In the process, the term can be extended to make the payments more manageable.
What loans are eligible for consolidation?
Perkins loans, subsidized and unsubsidized Stafford loans, Parent PLUS loans and Student PLUS loans are all eligible for consolidation, regardless of whether they originated with the now defunct Federal Family Education Loan (FFEL) Program or the Federal Direct Loan Program (FDLP). Perkins loans can only be consolidated with at least one other eligible loan, but not by themselves. Private loans cannot be included in the consolidation although they can be consolidated separately through a commercial lender.
Borrowers who are in default on a loan or who are delinquent in their payments may also consolidate their loans after certain requirements have been met. These borrowers will need to make three consecutive, voluntary and on-time payments to their existing lenders before becoming eligible for consolidation. Alternatively, they may consolidate their loans under the Income Based Repayment Plan. This plan adjusts the monthly payment amount annually based on the borrower’s income, family size and amount borrowed.
When can the loans be consolidated?
Stafford loans can be consolidated after the student has graduated, left school or dropped below half-time. PLUS loans can be consolidated after they have been completely disbursed. Repayment starts 60 days after the new loan has been disbursed.
What are the benefits of consolidating?
Consolidating loans will simplify the repayment process by replacing multiple payments with one payment to one lender. It also enables a borrower to reduce monthly payments to a manageable amount by choosing a longer repayment term. Borrowers who have exhausted their original deferment benefits may be able to take advantage of renewed deferment benefits. Deferment can be authorized for situations such as military service, unemployment, enrollment in school and a few other situations. Note that the amount owed on subsidized loans will be kept separate from unsubsidized loans and that the interest accrual benefits of subsidized loans will be applicable to this portion. The two portions will still be considered one loan and will have one payment.
What are the downsides of consolidating loans?
If there are benefits of the original loan that the borrower may take advantage of such as loan forgiveness or deferment options, they should not consolidate those loans as these benefits will not pass onto the consolidated loan. Perkins loan holders should not consolidate their Perkins loan unless there is no chance that they will be able to take advantage of the loan forgiveness option for working in a specific field.
What are the terms for a consolidated loan?
As with the original federal loans, the interest rate for consolidated loans is fixed and is calculated using the same formula for all borrowers independent of credit history. For parents seeking a PLUS loan consolidation, there will be a modest credit check done as there was for the original loan. There are no fees or prepayment penalties with these loans.
The interest rate for consolidated loans is the weighted average of the interest rates on the loans being consolidated, at the time of consolidation. This rate is rounded up to the nearest 1/8th percent and will not go above a maximum rate, which may vary from year to year but has recently been about 8.25 percent.
Repayment periods will vary from 10 to 30 years depending on the amount being consolidated and the repayment option chosen. Repayment options include fixed payments, graduated payments, extended payments and income based payments. The borrower may switch between the options at any time (except for the income based plan) and may do so as many times as they like. The details are spelled out in the Federal Direct Consolidation Loan Information Center website FAQ’s.
In what situations should a borrower NOT consolidate all their federal loans?
As discussed above, if there are benefits of the original loan that the borrower may take advantage of, such as those pertaining to a Perkins loan, then consolidation of that loan may not be wise. If the borrower has a short-term issue with making payments, they should look into forbearance or deferment options before considering consolidation. Federal loans allow a borrower to defer payments during times of unemployment, economic hardship and if they are attending school at least half-time.
What does a borrower need to do to start the process?
FFELP borrowers can no longer consolidate their loans thorugh a commerical lender so they should apply for a FDLP consolidated loan. Borrowers should go to the Federal Direct Consolidation Loans Information Center website and go through the steps listed there. The application can be filled out and submitted online.
Loan Consolidation Tips
- Existing loan payments need to be kept current until consolidation is completed – If immediate relief is needed, the borrower should apply for deferment or forbearance.
- Once loans are consolidated, there is no going back – Borrowers need to make sure they study their options fully before committing.
- Consolidating Perkins loans may not make sense – Perkins loans do not accrue interest while in deferment, a benefit not passed on when consolidated.
- Existing consolidated loans can be consolidated again – If an additional loan is included in the consolidation.
Resources
Federal Direct Consolidation Loans Information Center – This site provides very detailed information about consolidated loans available through the U.S. Department of Education.
Student Aid on the Web - Loan Consolidation program description – Provides information on both FFELP and Direct Loan consolidation.
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