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Consolidation

IMPORTANT: Federal Student Loan Consolidation is FREE!
Recently there have been advertisements and infomercials on the radio and television regarding defaulted student loan debt relief . Private companies are stating they can help stop harassing collection calls as well as restore credit for defaulted student loan debt. These companies are promoting a service for a fee of up to $500. The federal government will do all of this for free. You can consolidate your loans by visiting www.loanconsolidation.ed.gov. DO NOT be fooled! DO NOT pay anyone to consolidate your loans.

Questions about default repair and federal loan consolidation may be answered by our own BC Loan Repayment staff. Call us 800-294-0294 if you have concerns or need assistance.

July 1, 2013: Federal Stafford Interest Rates are Announced
From July 1, 2013, to June 30, 2014, variable Stafford loans that have not not been consolidated will accrue interest at:

  • 1.75% during the grace period
  • 2.35% during the repayment period

All May 2013 graduates with variable loans contemplating loan consolidation should apply to consolidation companies between October and November 2013 while still in the grace period in order to maximize their benefit.

What is Consolidation?
A consolidation loan combines several individual student loans with various interest rates and repayment schedules into one larger loan from a single lender. Consolidation loans are available for federal loans, including the Federal Family Education Loan Program (Stafford; PLUS), Perkins, Health Professional Student Loans, Nursing, and Direct Loans.

Note: Including a Perkins Loan in a consolidation will result in loss of entitlements. You will no longer be able to apply for forgiveness (loan cancellation) for occupations such as teaching, nursing, social work, or law enforcement. See our Cancellation page for descriptions of these benefits.

Pros:

  • Single servicing company
  • Fixed interest rate
  • One monthly payment, generally lower than individual payments
  • Full eligibility for deferment and forbearance
  • Extended repayment term from 12 to 30 years, depending on the total loan debt
  • Eligible for federal forgiveness programs

Typical repayment lengths for consolidated loans
Amount Years to Repay
<$10,000–19,999 15
$20,000–39,999 20
$40,000–59,999 25
$60,000 to $600,000 30


Cons:

  • Loss of grace period: Repayment starts within 60 days of disbursement.
  • Loss of benefits tied to underlying loans (e.g., Perkins cancellations)
  • Loss of subsidized interest benefit on Perkins
  • Likely increase in total repayment amount: The longer you take to pay off the loan, the more interest you will ultimately pay.

You may consolidate Federal Loans in the following way:

  • Direct Loans; FFEL Lender participation. Direct Consolidation Loans are available from the U.S. Department of Education. Visit LoanConsolidation.Ed.gov for more information.

If you are in default on a federal education loan, you may receive a consolidation loan from the Direct Program if certain conditions are met.

The benefits of consolidation differ for each borrower. In order to offset increased interest expenses, you can make larger payments, applying the extra as an over payment on principal.

Get all the facts first before opting for a consolidation loan. You may be relinquishing your deferment or repayment options. Your signature on the consolidation application and promissory note obligates you to the terms of the new loan. You do not have to consolidate all of your loans, but any loans you list on the application will be consolidated. To learn more, consult with your student loan office or financial advisor.

Interest Rate Calculation
The interest rate on a consolidation loan 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%.

For example, suppose a student has just Stafford loans originated on or after July 1, 2006. These loans have a fixed interest rate of 6.8%. When they are consolidated by themselves, the consolidation loan will have an interest rate of 6 7/8ths of a percent, or 6.875%. So, the interest rate increases only slightly.

If the borrower has a mix of loans with different interest rates, the weighted average will be somewhere in between. For example, if the borrower has $5,000 of Perkins Loans (at 5.0%) and $10,000 of Stafford Loans (at 6.8%), the weighted average is:

$5,000 x 5.0% + $10,000 x 6.8%
------------------------------                    = 6.2%
$5,000 + $10,000

This weighted average, 6.2%, is then rounded up to the nearest 1/8th of a percent, yielding a consolidation loan interest rate of 6.25%.

Note that the weighted average does not fundamentally alter the underlying cost of the loan. It preserves the cost structure by including each interest rate to the extent that it applies to part of the overall loan balance. For example, the consolidation loan in the previous paragraph says that of the $15,000 consolidation loan balance, $5,000 will be at 5.0% and $10,000 at 6.8%, yielding an equivalent interest rate of 6.2%.

If you are consolidating loans with different interest rates, the weighted average interest rate will always be in between. Don't be fooled if someone tries to suggest that this will save you money by getting you a lower interest rate. The interest rate may be lower than the highest of your interest rates, but it is also higher than the lowest of your interest rates. More importantly, the amount of interest you pay over the lifetime of the loan will be about the same.

Special note to PLUS Loan borrowers: If you consolidate an 8.5% PLUS Loan, your interest rate will DECREASE to 8.25% due to the federally mandated maximum, so long as the PLUS Loans are consolidated.

Repayment Plans
  • Standard Repayment Plan
  • Extended Repayment Plan
  • Graduated Repayment Plan
  • Income-Sensitive Repayment Plan
  • Income-Contingent Repayment Plan (Direct Loan Program only)
  • Income-Based Repayment Plan (beginning 7/1/09)

When should I consolidate?
You may consolidate at any time during Grace or Repayment.

Consolidation is not for everyone. It all depends on your individual situation.

Pay attention to what's happening with interest rates!
The Federal government sets the Stafford loan interest rate every July 1. (Current data shows potential for decrease.) If you have variable-rate loans and the rate goes down, then wait to consolidate until after July 1.

For general information, visit http://studentaid.ed.gov/repay-loans/consolidation. FinAid.org also has a loan calculator you may access.

Consolidation is a topic that is discussed during exit interviews. Student Loan staff are always available for additional consultation.

Alternative/Private Loans
You may not consolidate Federal Loans together with Alternative Loans. There are programs specifically for Alternative Loan consolidation.

Your best bet is to research banks and lending institutions thoroughly before making any decisions. An offer that looks "too good to be true" probably is. The primary benefit to consolidation should be to lock in a fixed rate of interest.