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Loan Consolidation

Checklist Tool for Consolidation

A Consolidation Loan allows you to combine your federal student loans into a single loan with one monthly payment, which can be significantly lower than the payment required under the standard 10-year repayment option. Under the Federal Family Education Loan (FFEL) Program, banks, secondary markets, credit unions, and other lenders provide the Consolidation Loans. Under the William D. Ford Federal Direct Loan (Direct Loan) Program, the federal government provides the loans.

Most federal education loans are eligible for consolidation, including subsidized and unsubsidized Direct and FFEL Stafford Loans, SLS, Federal Perkins Loans, Federal Nursing Loans, and Health Education Assistance Loans. Private education loans are not eligible. PLUS Loan borrowers (parent borrowers) also can consolidate their loans.

To obtain a complete list of the federal student loans that can be consolidated

Eligibility rules - All FFEL and Direct Stafford Loan borrowers are eligible to consolidate after they graduate, leave school, or drop below half-time enrollment.

You can also get a Direct Consolidation Loan (but not a FFEL Consolidation Loan) while you're in school. You must, however, be attending at least half time and have at least one Direct Loan or FFEL in an “in-school period.” (Generally, your loan is in an in-school period if you have been continuously enrolled at least half time since the loan was disbursed.) In addition, if the school you’re attending does not participate in the Direct Loan Program, at least one of the loans you consolidate must be a Direct Loan.

PLUS loans are eligible for consolidation once they are fully disbursed.

Borrowers who are delinquent or in default must meet certain requirements before they may consolidate their loans. Contact your loan holder for more information.

Under FFEL consolidation, if the same holder holds all the loans you want to consolidate, you must obtain the Consolidation Loan from that holder, unless you haven't been able to get a loan with income-sensitive repayment terms that are acceptable to you.

To get a Direct Consolidation Loan, you must consolidate at least one Direct Loan or FFEL. If you don't have a Direct Loan but you have a FFEL, you must first contact a FFEL lender that makes FFEL Consolidation Loans to ask about obtaining a FFEL Consolidation Loan. If you can't get such a loan, or you can't get one with acceptable income-sensitive repayment terms, and you're eligible for the Direct Loan Income Contingent Repayment Plan, you can apply for a Direct Consolidation Loan. Note that borrowers with one or more Direct Loans, including Consolidation Loans, can consolidate under the FFEL Consolidation Loan Program if they choose.

If you want to consolidate during your grace period and you have a Direct Consolidation Loan, you'll still keep your grace period after you leave school. If you have a FFEL Consolidation Loan, you won't keep your grace period, so it’s best to consolidate near the end of the grace period so you keep as much of it as possible.

Interest rate - The interest rate for FFEL and Direct Consolidation Loans is set according to a formula established by federal statute. The fixed rate is based on the weighted average of the interest rates on the loans at the time you consolidate, rounded up to the nearest one-eighth of a percent. The interest rate does not exceed 8.25 percent. The consolidation rate is fixed for the life of the loan, which protects you from future increases in variable rate loans but prevents you from benefiting from future decreases in variable rates.

Borrowers with Stafford Loans issued on or after July 1, 1995, can reduce the consolidation rate by up to half a percentage point or more by consolidating before the end of the grace period.

If a borrower wanted to consolidate only Direct or FFEL Stafford Loans made on or after July 1, 1998, the 2003-04 Consolidation Loan interest rate for loans that have entered repayment would be 3.5 percent (down from 4.125 percent). To consolidate those same loans during a grace or deferment period, the rate would be 2.875 percent (down from 3.5 percent). The interest rate for PLUS Consolidation loans would be 4.25 percent.

The interest rate you would receive, however, depends on which federal student loans are being consolidated. For example, your rate would be higher if you consolidated a 5 percent Federal Perkins Loan along with a 3.42 percent Direct or FFEL Stafford Loan.

Obtaining a Consolidation Loan - For a FFEL Consolidation Loan, contact the consolidation department of a participating lender for an application or more information. (Your parents should do the same thing if they want to apply for a FFEL PLUS Consolidation Loan.)

For Direct Loans, you (and your parents, for a Direct PLUS Consolidation Loan) can contact the Direct Loan Origination Center’s Consolidation Department at the Web site given above.

Note that if your parents want to apply for a FFEL PLUS Consolidation Loan, no credit checks are required. If they want to apply for a Direct PLUS Consolidation Loan, they are subject to a check for adverse credit history.

Repayment period - Repayment of Consolidation Loans begins within 60 days of the disbursement of the loan. The payback term ranges from 10 to 30 years, depending on the amount of education debt being repaid and the repayment option you select. Education loans not included in the Consolidation Loan are considered in determining the maximum payback period. You may elect to repay your loans under a shorter period than the maximum allowed.

All the FFEL repayment plans are available to FFEL Consolidation Loan borrowers. For Direct Consolidation Loan borrowers, most of the Direct Loan repayment plans are available, except that Direct PLUS Consolidation Loans are not eligible to be repaid under the Income Contingent Repayment Plan and might not be eligible for some discharge/cancellation benefits. Check with the holder of your loan. You can also read more about repayment plan choices here.

Always Consider the Cost

You should keep in mind that although consolidation can simplify loan repayment and lower your monthly payment, it also can significantly increase the total cost of repaying your loans. Consolidation offers lower monthly payments by giving borrowers up to 30 years to repay their loans. So, you'll make more payments and pay more in interest. In fact, in some situations consolidation can double your 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. You also should take into account the impact of losing any borrower benefits offered under non-consolidated repayment plans. Borrower benefits, which may include interest rate discounts, principal rebates, or some loan cancellation benefits can significantly reduce the cost of repaying your loans.

Once made, Federal Consolidation Loans cannot be unmade. That's because the loans that were consolidated have been paid off and no longer exist. Take the time to study your consolidation options before you submit your application. This checklist has been designed to help you determine whether and how you should consolidate your loans.

Last updated/reviewed October 30, 2006