A Federal Consolidation loan is a way to re-finance your federal student loans after graduation. Consolidation is not the best option for everyone, and not all lenders offer consolidation.
When you consolidate your federal student loans, the consolidating lender – the company that is consolidating the loans for you – pays off your individual loans and issues you one, new loan for the total amount. Almost all federal education loans are eligible for consolidation, but private or alternative loans are not. If you choose to extend your repayment term, you will generally have between 12 and 30 years to repay a consolidation loan, rather than the standard 10-year term for unconsolidated federal loans. Aside from a slight increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. There are no fees to consolidate, however consolidation can also increase your total amount of interest paid, as you pay back your loan over a much longer period of time. The friendly people in the Financial Advisement office suggest that you fully research the pros and cons, come into our office and talk to your advisor or contact American Student Assistance at 1-866-493-5563.
Who can consolidate…?
Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)
Students can only consolidate their education loans during the grace period or after the loans enter repayment. Parents, however, can consolidate PLUS loans at any time.
You can consolidate with any participating lender…
Students and parents can consolidate their loans with any lender, including the Federal Direct Loan servicer. Federal Direct Loans can also be consolidated with any lender. Since consolidation loans are not very profitable for lenders, many lenders choose not to offer them, or will only offer them to existing customers. Also, most lenders require a minimum balance before they will consolidate your loans. The Federal Direct Consolidation Loan program has no minimum balance for consolidation loans.
Interest rates
The interest rate on a consolidation loan is fixed and is determined by taking the weighted average of the interest rates on your existing loans and rounding up to the nearest one-eighth of a percent and capped at 8.25%.
Pros
Consolidating your federal student loans while interest rates are low can be a good idea, especially if you have a large amount of variable-rate student loan debt, as consolidating may help you save money over the life of your loans. By consolidating, you lock in an interest rate that is the weighted average of the interest rates on the loans you are consolidating, and you protect yourself against the possibility that rates will rise in the future. Fixed-rate student loans will not be affected by interest rate fluctuations. Consolidating may reduce your monthly payment amount because the repayment term for consolidation loans is typically longer than the repayment term for unconsolidated loans, depending on how much student loan debt you carry. Consolidation also provides the convenience of having to pay only one monthly bill for all of your educational debt, rather than having to keep track of several monthly bills.
Cons
Although there are benefits, consolidating may have a downside. If interest rates decrease in the future, the rate on your consolidated loans will not drop whereas the rate on your unconsolidated variable-rate student loans would have gone down. If interest rates remain below your rate for a long period of time, you may end up paying more over the life of your loan than if you had waited and consolidated later or not consolidated your variable-rate student loans at all. Also, although the interest rate on a consolidation loan is fixed, the total amount of interest you pay is not. By reducing your monthly payments and extending the period of time you take to repay your loans, you increase the amount of time during which you will be charged interest and the size of your outstanding balance on which your interest charges are based. This means the total amount of interest you pay over the life of your loan will increase with a consolidation loan versus the standard repayment term and monthly payment. However, you can overcome this by repaying your consolidated loan more quickly by making larger monthly payments, if you can afford to do so. Additionally, if you took out a Federal Perkins Loan, you should probably NOT include it in consolidation. The interest rate on a Federal Perkins Loan is fixed at 5% and will never go up or down. Also, Federal Perkins Loans have a forgiveness provision that is lost in consolidation. It is important to know that consolidation loans are not eligible for all loan forgiveness programs. Make sure you know what benefits you are giving up. For example, your existing loans may have included interest rate discounts or other benefits. Consolidation may invalidate these offers, resulting in a higher cost to you.
Get advice from people you can trust: Of course, we are always here in the Financial Advisement Office to help you understand these complex issues. If you’re not sure if consolidation is right for you, contact your Advisor in the Financial Advisement Office and we’ll help you to carefully consider your options.