Understanding Loan Consolidation: Is it the Right Move for You?

What is a consolidation loan?
A consolidation loan pays off the outstanding combined balances for one or more federal student loans and creates a new single loan with a fixed interest rate. One lender holds the loan and you make one monthly payment. The Repayment terms depend on the amount consolidated, the type of payment plan you choose, and the length of the loan term. The following information can help you decide whether loan consolidation is the right decision for you.   As of 7/1/10, the Department of Education’s William D. Ford Direct Loan Program (Direct Loan) is the only authorized lender of new Title IV federal student loans. 
What loans can be consolidated?

• Stafford Loans
• PLUS Loans (Parent and GRAD)
• Perkins Loans*
• Health Professions Student Loans (HPSL)*
• Health Education Assistance Loans (HEAL)*
• Nursing Student Loans (NSLP)*
• National Direct Student Loans (NDSL)*
• SLS Loan (formerly ALAS Loans)
• Federal Insured Student Loan (FISL)*

*You must also include a Stafford, PLUS, or consolidation loan to consolidate these loans.

Note: Some loans may not be eligible for federal loan consolidation. Check with Direct Loan if you have a loan different from ones listed here.   They can be reached at (800) 557-7392 or http://www.loanconsolidation.ed.gov/.
Not sure what kind of loans you have?
Go to the National Student Loan Data System (NSLDS) at http://www.nslds.ed.gov/nslds_SA/ to confirm your federal student loans. For other loans, refer to your financial aid information or the exit interview material you received when you left school.
What are the benefits of consolidating?
Benefits

• It’s easier to make one payment to a single lender.
• Consolidation loans have a fixed interest rate, calculated using the weighted-average of the interest rates of your existing loans, rounded up to the nearest 0.125%, to a maximum of 8.25%.
• A single consolidation loan monthly payment may be lower than the total of payments made on multiple loans.
• If you’re having trouble making your monthly payments, a longer loan repayment period may provide financial relief. You may extend the repayment period up to 30 years, depending on the loan balance and repayment plan you choose.
• Several different repayment plans are available to accommodate differing financial circumstances.
• If defaulted loans are paid by a new consolidation loan, your credit report is updated to show a new consolidation loan that starts in good standing.
• Under the terms of the new loan, you may have the right to payment relief  (such as deferment, forbearance or reduced payments) if it can be justified.

Important things to consider before you consolidate:

• As of July 1, 2010, the Department of Education’s Direct Loan Program is the only authorized lender of new Title IV federal student loans.  Be sure you are talking with the Department of Education Direct Loan program.
• Loan cancellation benefits are lost if you include your Perkins loan in a consolidation.
• Consider your goals; be aware of the long-term effects and your ability to make the required monthly payments. If repayment is affordable without consolidating, then a consolidation loan may not be your best option. However, if you simply cannot make the payment under a 10-year repayment plan, and consolidating helps you to better manage repayment, then consolidation may be a better option.
• DON’T consolidate your federal and private loans together into a private loan (i.e., consumer loan) because you will lose some of the benefits of your federal student loans, e.g., grace periods, subsidies, deferments, discharge/cancellation options and possibly other benefits.
• Congress has granted temporary authority that allows borrowers to consolidate while in school.  The variable interest rate on Stafford loans is currently very low and consolidating can fix your interest rate at the current level.  Remember, if you consolidate while in school, you will lose your grace period and repayment will start within 60 days from the date you leave school or drop below half-time attendance.
• And remember that once you consolidate, your options for re-consolidation are limited.

Consolidating Perkins Loans

• Interest Rate -- Perkins Loans are at a fixed interest rate of 5%. What will be the weighted average of the consolidation loan?
• Interest Subsidy and Deferment Options--In general, Perkins Loans have more deferment options than you will have for a consolidation loan, and you will lose the interest subsidy if the Perkins Loan becomes part of a consolidation.
• Cancellation Benefits--Any Perkins Loan cancellation or loan forgiveness benefits are lost when you consolidate.

Consolidating during your grace period

• If you have a variable interest rate Stafford loan and consolidate it during your grace period, the interest rate is 0.6 percent lower than if you were consolidating when in repayment.
• You should not apply for a consolidation loan too early during your six-month grace period, otherwise you will automatically lose the remainder of it because your first consolidation loan payment will be due within 60 days from the date the consolidation loan is made.
• If you are interested in obtaining a William D. Ford Direct Consolidation Loan (Direct Loan) during your grace period, Direct Loan recommends that “borrowers should wait until about half-way through the 6-month grace period before applying for a Direct Consolidation Loan” to avoid forfeiting the remaining portion of your grace period.

Consolidating defaulted loans

• Consolidation offers a relatively easy mechanism to satisfy defaulted federal student loans, to restore eligibility for additional federal student aid if no other unresolved debts remain, and to repay a loan obligation without the pressure of being in a default status.

Prerequisites

• A defaulted federal student loan may be included in a consolidation loan after you’ve made arrangements with the loan holder and made several voluntary payments. Loan holders usually require three consecutive, voluntary, and on-time payments prior to consolidation.

Additional fees

• A guaranty agency may charge collection or late fees up to 18.5 percent of the outstanding loan (including the principal and interest). The fees become part of the principal for the consolidation loan. For example, a defaulted loan of $8,500, with $1,500 of accrued interest = $10,000. Fees of $1,850 can be added to the $10,000, which means the consolidation loan will be made for $11,850.

Consolidation Costs

• There are no fees charged to consolidate your loan.
• Any outstanding interest and fees at the time you consolidate will be added to the principal balance of the new consolidation loan. Thus, monthly interest accrual on the consolidation loan may be higher than on the original loans.
• High-balance loans have a longer repayment period. While the monthly payment is lower because of the longer repayment period, you pay more in total interest. Examples 1 and 2 (shown below) demonstrate how a longer repayment period affects the total amount of interest paid.
• Compare the differences in the total paid!

Example 1
If you have a $15,000 loan balance and a 7.1% variable interest rate, repayment for a non-consolidated loan could look something like this:

$15,000 Non-consolidated loan 10-year Repayment Period Monthly Payment - $175 Total Interest Paid - $6,000* (*Amount will change with interest rate fluctuations.) Total Paid - $21,000
Meanwhile, repayment for a consolidation loan could look like either of these:
$15,000 Consolidation loan 15-year Repayment Period Extended Repayment - $135 Total Interest Paid - $9,500 Total Paid - $24,5000	$15,000 Consolidation loan 15-year Repayment Period (gradually goes up to $250) Graduated Payment - $89 Total Interest Paid - $11,900 Total Paid - $26,900

Example 2
If you have a $60,000 loan balance and at a 7.1% weighted-average interest rate, repayment for a non-consolidated loan could look something like this:

$60,000 Non-consolidated loan 10-year Repayment Period Monthly Payment - $700 Total Interest Paid - $24,000 Total Paid - $84,000
Repayment for a consolidation loan could be:
$60,000 Consolidation loan 30-year Repayment Period Monthly Payment - $400 Total Interest Paid - $85,500 Total Paid - $145,500

How do I consolidate my federal student loans?
Start by going to http://loanconsolidation.ed.gov/. 
Things to consider while Direct Loan is processing your application:

• CAREFULLY read the entire application & promissory note before signing anything.
• Read Direct Loan’s website information VERY carefully, especially the Borrower’s Rights and Responsibilities.
• If you do change your mind, immediately notify Direct Loan by phone at (800)557-7392 AND IN WRITING that you do not wish to consolidate. You cannot undo a consolidation loan, except in very rare circumstances.

Things to consider after you consolidate:

• You may add more federal FFEL or Direct Loan student loans to your consolidation loan simply by contacting your consolidator within the first 180 days after the consolidation loan is made. Afterwards, you would have to apply for a new consolidation loan in order to add loans to an existing consolidation loan.
• If you are unhappy with your Direct Loan consolidation, you cannot ask that the loan be transferred.
• Keep copies of all correspondence or documentation related to your student loan.
• Make sure that you notify Direct Loan of any change in your address or name.
• Be proactive! Take control of your loan situation, keep in touch with your lender/servicer, ask questions, and make sure you understand what to expect.