Consolidation

July 1, 2008 Federal Stafford Interest Rates are Announced

Variable Stafford Loans which have not been consolidated will accrue at:

3.61% during the Grace period
4.21% during the Repayment period

All 2008 graduates contemplating loan consolidation should apply to  consolidation companies between July and November 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  web page for descriptions of these benefits.

Pros:

  • Single point of contact for customer service
  • 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
  • $7,500 to $9,999—10 Years
  • $10,000 to $19,999—15 Years
  • $20,000 to $39,999—20 Years
  • $40,000 to $59,999—25 Years
  • $60,000 to $600,000—30 Years

Cons:

  • Loss of grace period—repayment starts w/in 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 two ways:

1. Direct Loans; FFEL Lender participation. Direct Consolidation Loans are available from the U.S. Department of Education. Visit http://loanconsolidation.ed.gov/ for more information.

2. FFELP Consolidation Loans are available from participating lenders such as banks, credit unions, and savings and loan associations.

If you are in default on a federal education loan, you may receive a consolidation loan from some lenders or the Direct Program if certain conditions are met. Check with your lender to determine if you are eligible.

Note that a lender may not refuse to consolidate your loans because of:

  • interest rate you would be charged on a consolidation loan
  • number or type of loans you want to consolidate
  • types of repayment schedules available to you
  • type of school you attended

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 early 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 lender, financial advisor, or student loan office.

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 and 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 by themselves.

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?

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 AFTER July 1.

For general Information, visit http://www.finaid.org/loans/consolidation.phtml or http://www.mapping-your-future.org/paying/cnsldte.htm. To access a loan calculator, visit http://www.finaid.org/calculators/loanconsolidation.phtml.

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.