Federal Loan Consolidation Frequently Asked Questions
- What is Federal Loan Consolidation?
- What are the benefits of consolidating?
- Am I eligible to do a consolidation loan?
- Who should I choose to consolidate my federal loans?
- When should I consolidate?
- What are the drawbacks to consolidation?
- Can I consolidate private loans?
- Is Federal Consolidation a good idea?
What is Federal Loan Consolidation?
Federal Loan Consolidation is the process of taking all of your federal education loans (Stafford, Perkins, etc.) and combining them into one new loan. Currently, Federal Consolidation loans have a fixed interest rate based on the weighted average of the loans that you are combining into the new loan.
What are the benefits of consolidating?
Consolidating will allow you to take variable-rate Stafford loans and change them into a fixed-rate loan. Also by consolidating you will only have to make one payment each month instead of making payments to multiple loans and possibly to multiple loan servicers.
Am I eligible to do a consolidation loan?
If you have at least $7500 in federal education loans in grace or repayment period, then you can consolidate your federal loans. If you have loans currently in default you should contact your loan servicer to see if you are eligible to consolidate.
Who should I choose to consolidate my federal loans?
In October 2007, Congress made significant changes to the federal loan programs. Amongst these changes were significant reductions in the profits that private lenders made on Federal Consolidation Loans. Since these loans have become largely unprofitable, many private lenders are no longer making these loans. However, the Federal Government itself is still making these loans through the William D. Ford Federal Direct Program. More information can be found at http://www.loanconsolidation.ed.gov
When should I consolidate?
Typically we recommend that students with Stafford loans begin the consolidation process around the fourth month of their grace period. The reason for this recommendation is that once your lender completes all of the paperwork for your consolidation loan, you will enter repayment and lose whatever portion of your grace period you have left. By consolidating it in the fourth month of your grace period, you receive most of the benefit of your grace period while also receiving the benefits of consolidating early. Because the grace period has the "in school" interest rate for Stafford loans, students who consolidate during their grace period lock in the lower "in school" interest rate.
What are the drawbacks to consolidation?
- Once you consolidate your federal loans you cannot consolidate them again unless you have at least one new federal loan to add to the consolidation.
- For students with Subsidized Stafford Loans the government is paying the interest on your Subsidized Stafford Loans while you are in your grace period. So if you consolidate during your grace period, you may have a lower interest rate on your new consolidation loan, but the government will not continue to be paying the interest on the Subsidized portion of your loans as you will now be entering repayment. (Some lenders will allow you to begin the consolidation process during your grace period so that you will receive the lower interest rate, but will delay fully processing the consolidation loan until the end of your grace period so that you receive the full benefit of your grace period. Check with your consolidating lender to see if they are willing to do this for you if you are in your grace period.)
- If you consolidate Perkins loans in a Federal Consolidation loan, you may lose some of the forgiveness opportunities that are available under the Perkins loan program.
Can I consolidate private loans?
Borrowers can't consolidate private education loans into a Federal Consolidation Loan. Many lenders will offer a separate consolidation loan product that will allow students to consolidate their private education loans together, but usually these private consolidation loans have new origination fees associated with them, so usually this is not in the best interest of the borrower.
Is Federal Consolidation a good idea?
Consolidating Federal Stafford Loans into a Federal Consolidation Loan is a good idea for most borrowers in today's market. Consolidation can allow borrowers to extend payments beyond the normal 10-year repayment period of their Stafford loans, depending on the amount borrowed.
Alumni, current students, and parents are more than welcome to contact us with any questions they have regarding Federal Consolidation.
