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.

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 Student loan consolidation programs allow for a borrower's loans to be paid off and a new consolidated loan created. These programs simply loan repayment by combining several types of Federal education loans into one new loan. The interest rate may be lower than on one or more of the underlying loans. Additionally, the monthly payment amount on a consolidated loan is usually lower and the amount of time to repay may be extended beyond what was available in the separate loan programs. These features generally result in more manageable debt and should make borrower's less likely to default on the loan. If you have a federal student loan, you may have already received marketing materials from various lenders promoting their consolidation programs.

If all your loans are with the same lender and it offers loan consolidation, you must stick with that lender. Likewise, borrowers with just one loan can lock in the fixed rate, but must go through the company that holds the loan. Borrowers with loans from multiple lenders can consolidate with any. There are two particular features to look for when searching for a loan consolidation program. First, many lenders will cut your interest rate if you agree to have payment deducted automatically from your checking account. Likewise, they may cut your interest rate after you have made several on-time payments. For legitimacy purposes, you may also want to look out for lenders with toll-free customer service phone numbers and adequate counseling programs. America’s Student Loan Providers issued the following statement by Executive Director Kevin Bruns in response to the newly released report by the U.S. Government Accountability Office (GAO), titled, “Federal Student Loans: Challenges in Estimating Federal Subsidy Costs”:

“The GAO’s report is ‘deja vu all over again.’ For the second time this year, and about the sixth time in ten years, independent experts conclude that federal budget rules are flawed: They do not accurately compare the real, long-term costs of the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program.

“GAO accepts the position of PricewaterhouseCoopers (PWC), ASLP and others that the factors missing from the current government estimates are significant, and that including them would give a better estimate of the true program costs.

“In particular, GAO now accepts PWC’s and ASLP’s position that a true cost comparison would account for both tax revenues generated by FFELP loan providers and risks to direct loans from defaults, consolidations or interest rate fluctuations. The report’s final point bears repeating: ‘Consideration of all federal costs and revenues of the loan programs would be an important component of a broader assessment of the costs and benefits of the two programs.’

“Regrettably, GAO’s report may perpetuate the false notion that direct loans cost taxpayers less than guaranteed loans. It notes the flaws in the government’s estimates, yet never accounts for them while comparing the programs’ official subsidy rates. Its ‘on the one hand, on the other hand’ analysis is misleading and disappointing.

“Nor does the report provide any new data or make any policy recommendations. We share the requesters’ goal of getting better cost estimates, and indeed have done work to facilitate the improvement of the estimates.

“ASLP’s paper, The Federal Family Education Loan Program: A Better Deal For Students & Taxpayers (July 12, 2005), remains the only serious effort to put a dollar figure on the impact of flaws in federal budget rules. After correcting for the obvious errors in program cost estimates, we concluded that no significant difference exists between the FFELP’s costs to taxpayers and the direct loan program’s.

“ASLP found that the subsidy rate for the FFELP is 7.62 percent, not 9.40 percent, as stated in the FY 2006 budget. And the Direct Loan program’s subsidy rate is 7.67 percent, not 1.76 percent."