Consolidation

A good source of information on consolidation can be found on the Department of Education's Direct Loan website:  loanconsolidation.ed.gov.  Please click on the FAQ for more specific information as it relates to your consolidation options.

Consolidation - Is It Right For You?

The federal student loan industry has undergone a series of significant changes within the past few years.  Many federal student loans from the 2008-'09 and 2009-'10 academic school years have been sold to the Department of Education.  These changes have made it much more complicated for you as a borrower to manage your loans. As part of the Health Care and Education Reconciliation Act of 2010, the federal government has eliminated the FFEL (First Family Education Loan) program.  Federal student loans disbursed on or after July 1, 2010 must be funded directly from the Department of Education through the William D. Ford Direct Loan Program. Many of you will have both FFEL loans and Direct Loans in your loan portfolio.  To simplify your loan portfolio, many borrowers have elected to consolidate their loans with the federal government.  Because FFEL lenders are being phased out of the student loan industry, the predominant loan consolidation program offered is through the federal government (loanconsolidation.ed.gov), although a few FFEL lenders may offer consolidation as well. Consolidation allows you to combine the following types of loans into one new large loan:

• Federal Stafford and/or Federal Direct Loans
• Federal Perkins Loans
• Health and Human Services Loans

Most students receive a Direct Stafford Loan or a FFEL Stafford Loan as part of their financial aid award. Many students also received a FFEL Stafford Loan or a Federal Direct Stafford Loan during undergraduate school. Some students receive other loans, including Federal Perkins Loans or loans through the Department of Health and Human Services (e.g. Health Professions Student Loan, Nursing Student Loan, and Loan for Disadvantaged Student). While the interest rate on Perkins and HHS loans is fixed, the interest rate on Federal Stafford Loans and Federal Direct Loans disbursed prior to July 1, 2006 is variable and is set each spring for the period July 1 through June 30.  The interest rate for Federal Stafford Loans and Federal Direct Stafford Loans disbursed on or after July 1, 2006 is fixed.  You can log onto your servicers' websites or click here to determine the interest rates for each of your loans.

The interest rate for a Consolidation loan is set at a weighted average rate of the loans being consolidated, rounded up to the nearest 1/8th of a percent, not to exceed 8.25 percent.  Please click here for more details.

There are advantages and disadvantages to consolidating your loans. Whether you decide to consolidate your loans depends primarily on your overall short-term and long-term goals. Is it important for you to just have one monthly payment to one servicer? Are you pursuing the Public Service Loan Forgiveness Program? Do you still have any existing variable rate loans (loans originated prior to July 2006 which have not been consolidated previously)? You need to research your options carefully. Think about your own particular situation, which may be different from your friend’s situation or the “typical” student mentioned in many publications. Every borrower has different financial goals and thus, you should position your loan portfolio in a way that allows you to best meet your short and long term financial plans.

If you are thinking about consolidating, gather information carefully.  Consider which borrower benefits are available to you should you decide to consolidate and which existing borrower benefits quite possibly could be lost.

We have listed many considerations to think about as you decide whether or not consolidation is the right choice for you to make.

Convenience

Advantage: You can consolidate your separate federal loan payments into one monthly payment. Many borrowers believe this greatly simplifies the student loan repayment process.

Disadvantage: Non-federal loans, such as University Loans or private alternative loans cannot be included in a consolidation loan. Federal Perkins and Health and Human Services (HHS) Loans* have a 5 percent fixed rate interest and generally have more generous deferment options than Stafford/Direct Loans. You might also lose your in-school interest subsidy, so if you were thinking about returning to school, you would definitely not want to include these in a Consolidation loan. Regarding the interest rate, some borrowers believe the convenience of a single payment outweighs the slightly lower interest rate on certain loans.

• *HHS loans include Health Professions Student Loan (HPSL), Nursing Student Loan (NSL), Primary Care Loan (PCL), and Loans for Disadvantaged Students (LDS).

Deferments

Advantage: A Consolidation loan may grant some deferments, such as a deferment during periods you attend school at least half-time.  You should take time to consider how your eligibility for other deferments may be affected by consolidation. Eligibility for certain types of deferments can be lost under consolidation. Issues pertaining to grace periods, deferment, forbearance, loan forgiveness, and cancellation tend to be complicated and can become even more so with consolidation.  For more details on the effects on borrowers' underlying loan benefits including grace periods, loan forgiveness, cancellation, and deferment options, please refer to the Department of Education's rights and responsibilities as outlined in a Federal Direct Consolidation Loan Master Promissory Note.  Also, talk to your lender or servicer regarding the ramifications of consolidation on your specific deferment options and borrower benefits.

Disadvantage:  It is very important to remember that your Perkins loans and Health and Human Services Loans (i.e., Health Professions Loan, Nursing Student Loan, and Loan for Disadvantaged Students) will become unsubsidized loans when they are consolidated.  Please refer to the Department of Education's loan consolidation website for more information.

Borrower Benefits

 Most Stafford/Direct lenders offer a reduction in interest if you agree to make electronic payments directly from your checking or savings account. Please refer to your consolidation loan's  Master Promissory Note or contact the consolidation' servicer to determine if you still retain certain borrower benefits and to find out if there are any additional borrower benefits offered.

Many borrowers plan on consolidating through the Department of Education's Direct Consolidation website because of the borrower benefits available.  In addition, if you interested in pursuing the Public Service Loan Forgiveness (PSLF) Program, any non-defaulted loan made under the Direct Loan Program may be eligible.  Therefore, if you have previous Stafford loans made under the FFEL loan program, those loans may be eligible if they are consolidated into the Direct Loan Program.  Please refer to the Public Service Loan Forgiveness Program FAQ's from the Department of Education for more details.

Financial Implications

Advantage: As shown in the chart below, your monthly repayments can be substantially lower with a Consolidation loan that extends the repayment period beyond the standard 10 years. This, of course, increases your monthly cash flow.

Disadvantage: When you extend the repayment period, your interest payments and thus your total payments will be higher. For example, under the 10-year plan, if you borrowed $100,000 @ 6.8%, you’ll pay $38,097 in interest costs. However, if you take 30 years to repay, you’ll pay $134,689 in total interest costs, a difference of $96,593!

You can solve this problem by signing up for a shorter repayment period or by prepaying your loan principal by paying an additional amount towards your monthly payment. The latter approach gives you the best of both worlds. You’ll enjoy the benefits of a single monthly payment that is lower than the combined payments on your unconsolidated loans, plus you can prepay some of your principal whenever you have the extra funds to do so. Since you can prepay your federal loans at any time (consolidation or otherwise) without penalty, you can control the length of your repayment period and the total amount of interest you pay over the life of your loan. If you choose to prepay (or pay more than your required monthly payment),  it is often recommended that you designate your extra payment towards the principal of the loan and subsequently follow up to ensure that your lender has applied the additional payment in the manner that you specified.  Create an online account with your loan servicers so you can proactively manage your loans most efficiently.

Example: Standard Repayment vs. Consolidation:

Consult the Experts

Are you short of funds? Some financial planners think consolidation is important as a budget management tool if the total amount of your student loans and your credit card balances exceed what your yearly salary is likely to be once you begin practice.

Even if you are not short on funds, some financial planners believe you're better off in the long run if you obtain a lower monthly payment through consolidation and invest the funds that result from the reduced monthly payment into the purchase of a home or a tax-deferred retirement account.  If you are able to apply those extra funds towards the purchase of a home, you would most likely be able to deduct the mortgage interest paid thus reducing your federal income tax liability.

Questions to Ask Yourself Before Consolidating

1. What will my fixed interest rate really be?  
2. What deferments am I eligible to receive with or without consolidation?
3. How often is interest added to my principal balance during periods of deferment or forbearance? Is this capitalization policy better or worse than what I have now?
4. What repayment plans are available should I decide to consolidate? Can I change repayment plans? And if so, how often?
5. How much more total interest will I pay over the life of the Consolidation loan if I choose to not make any additional payments?
6. If financially able, would I actually speed up my repayment plan to reduce my total interest payments? Would I actually invest the money I save by having lower monthly payments?

More About Loan Consolidation

Please visit the following websites for more information:

Department of Education Direct Loan Consolidation
Consolidation Information from Department of ED
Finaid.org - Why Consolidate?
Weighted Average Interest Calculator