What is consolidation?
Consolidation allows you to simplify the repayment process by combining several types of federal education loans into one loan, so you make just one payment a month. Also, that monthly payment might be lower than what you're currently paying.
Under the FFEL Program, you can receive a Subsidized and/or an Unsubsidized FFEL Consolidation Loan, depending on the types of loans you're consolidating. (FFEL and PLUS Consolidation Loans are included under the Unsubsidized FFEL Consolidation Loan category.)
You can also consolidate Federal Perkins Loans and other federal education loans. To get a complete list of the kinds of federal student loans that can be consolidated:
- contact your Federal Stafford loan lender if you're applying for a FFEL Consolidation Loan.
Under FFEL consolidation, if the same holder holds all the loans you want to consolidate, you must obtain your consolidation loan from that holder, unless you haven't been able to get a loan with income-sensitive repayment terms.
Even if you're in default, you might be eligible for a Consolidation Loan if certain conditions are met. Talk to your loan holder(s).
What is the interest rate of a Federal Consolidation Loan?
It is a fixed rate set according to a formula established by law. The rate is the weighted average rate of the current rates charged on the loans being consolidated, rounded up to the nearest one-eighth of a percent. This means the rate you'll pay won't be more than one-eighth of a percent more than the effective rate on your individual loans. The rate is fixed for the life of the Consolidation Loan.
The weighted average interest rate is a single interest rate that is calculated by using the borrower's loan balances and the current annual interest rate for each of the borrower's loans.
For example: A borrower has two subsidized Federal Stafford Loans, one for $10,000 and the other for $5,000, both with an interest rate of 8.25 percent. The borrower also has a $3,500 unsubsidized Federal Stafford Loan with an interest rate of 7.46 percent and a $3,000 Federal Perkins Loan with a 5.0 percent interest rate. The borrower consolidates these loans.
The following steps outline one way to calculate the weighted average interest rate:
- Multiply the balance of each loan being consolidated by the interest rate that applies to that loan at the time the verification certificate is completed.
- Add the calculated interest amounts for all loans being consolidated ($1,648.60).
- Add the loan balances for all loans being consolidated ($21,500).
- Divide the sum of the calculated interest amounts by the sum of the loan balance amounts (7.66%).
- Round the quotient (the answer to Step 4) to the nearest higher one-eighth of one percent (7.75%).
- Compare the result in Step 5 to the 8.25% maximum interest rate and determine which is lower. The lower of the two rates is the borrower's fixed interest rate for the Consolidation loan.
The weighted average interest rate for the borrower in this example is 7.75%.
What is the repayment period for a Federal Consolidation Loan?
You'll have from 10 to 30 years, depending on the amount of your debt and the repayment option you choose.
So, consolidation seems like the way to go.
It might be, but although consolidation can simplify loan repayment and might lower your monthly payment, you should carefully consider whether you want to consolidate all your loans. For example, you might lose some discharge (cancellation) benefits if you include a Federal Perkins Loan in a FFEL Consolidation Loan. If that's the case, you might want to consolidate only your FFELs and not your Federal Perkins Loan(s). Also, you wouldn't want to lose any borrower benefits offered under your existing non-consolidated loans, such as interest rate discounts or principal rebates, which can significantly reduce the cost of repaying your loans.
You can have a longer period of time to repay your consolidation loan than you do for the individual student loans you're repaying, but this also means you'll pay more interest over time. In fact, consolidation can double total interest expense. If you don't need monthly payment relief, you should compare the cost of repaying your unconsolidated loans against the cost of repaying a consolidation loan. To help you figure the costs, contact your lender or loan servicer.
Once made, consolidation loans can't be unmade because the loans that were consolidated have been paid off and no longer exist. So, take the time to study your consolidation options before you apply.
For more details on loan consolidation, contact your loan holder or servicer.