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Consolidation loans combine one or more federal student loans into one new loan held by a single lender. Since July 1, 2010, the only available lender for federal consolidation loans is the U.S. Department of Education.
If you are having trouble keeping track of multiple student loan payments, consolidation could help. It can also be useful if you need to extend your repayment, want to qualify for Public Service Loan Forgiveness, or have run out of forbearance time. However, if you are just looking for a lower monthly payment, you may want to consider other repayment options before consolidation.
How It Works
You can begin the consolidation process online at loanconsolidation.ed.gov. Before you start, you should know a few things:
- You must have at least one eligible federal student loan to consolidate.
- You cannot consolidate private and federal loans together.
- The U.S. Department of Education (ED) does not require a minimum balance to consolidate your loans.
- Your new loan will have new terms.
- Your loan will have a new interest rate, which will be the weighted average of the loans you consolidated rounded up to the nearest 1/8th of a percent (for an example, see below).
- After you consolidate, your repayment schedule will be reset to standard repayment. You may then choose a different payment schedule.
- Based on your total education loan debt (including private loans), you could extend your repayment to a maximum of 30 years.
- Loan consolidation cannot be reversed.
- Consolidation loans can be reconsolidated to add additional eligible education loans.
- There are no penalties for prepayment or finishing repayment ahead of schedule.
Consolidation Pros and Cons
Some benefits of consolidation:
- Your loans will have a fixed interest rate based on the rates of the underlying loans.
- You will have one convenient payment per month to one lender, instead of multiple payments to different lenders.
- If you extend your repayment period, your new payment will be lower.
- Under certain conditions, you can postpone repayment by requesting a deferment or forbearance. Interest will continue accruing on unsubsidized portions of a Consolidation loan during periods of deferment and forbearance.
- If you have run out of deferment and forbearance time, you may be eligible for forbearance again after you consolidate.
- Federal Family Education Loan Program borrowers who consolidate into the Direct Loan program will gain access to military benefits and Public Service Loan Forgiveness.
Some disadvantages of consolidation:
- Due to the fixed interest rate, you will not benefit if the variable interest rate goes down.
- If you extend your payment period, you may be making payments for a longer time, which increases the amount of interest you pay over the long term.
- Your weighted interest rate will be rounded up to the nearest 1/8th of a percent (0.125).
- For older loans, you may lose some deferment options.
- For Perkins loans, you will lose some forgiveness options and your interest subsidy.
- If your Consolidation loan includes a Parent PLUS loan, you cannot repay your loan under the income-based repayment plan.
Obtaining a Consolidation Loan
When applying for a Consolidation loan, ensure all of your eligible loans are included by researching your loan history. Getting your federal student loan information is easy with the National Student Loan Data System.
If you have any questions about consolidation, contact American Student Assistance® (ASA). We can help you determine whether consolidation—or a different repayment option—is right for you.
Once you have all your information, and are certain that consolidation is the best choice for your loans, begin your application online at loanconsolidation.ed.gov.
Consolidation loan interest rates are calculated by using the process below.
As an example, if you were in repayment on a loan of $5,000 at 6.8% and a loan of $10,000 at 6.0%, your rate would be 6.375%. Here is why:
- The amount you owe on each loan is multiplied by its respective interest rate (5,000 x 0.068 = 340; 10,000 x 0.06 = 600).
- These amounts are then added together (340 + 600 = 940).
- This total is divided by the total amount you owe (940 / 15,000 = 0.063).
- Multiplied by 100, this number creates your weighted average interest rate (100 x 0.063 = 6.3).
- Your weighted average is then rounded up to the nearest 1/8% percent (6.3 + 0.075 = 6.375).
Keep in mind that rates are capped at 8.25%.