Did You Know?
♦ Applying for Direct Loan consolidation is FREE. Be wary of companies charging a lot of money for a free government program.
Consolidation is similar to refinancing a loan. You can consolidate all, just some, or even just one of your student loans. Consolidating federal student loans may be a good strategy to lower monthly payments or to get out of default, but it is not always a good idea.
Pros and Cons of Consolidation
- In the past, many borrowers consolidated their federal student loans to save money on interest payments. This “benefit” was not as great after 2006 when interest rates became fixed. The interest rates for consolidation loans are calculated based on the average interest rates of the loans that you are consolidating. If you have variable rate loans from before July 1, 2006, you may be able to get very significant interest rate reductions by consolidating. Borrowers with more recent loans may also get a benefit now that interest rates are changing each year. You should check the interest rates on your loans. The Department of Education has more information about consolidation loan interest rates. Federal student loan amounts and terms for 2015-16.
- Consolidation extends repayment, often lowering monthly payments, but creating more overall costs in interest over the life of the loan, and extending your obligation further into the future. If you are close to paying off your loans, consolidation may not be worthwhile.
- You may lose some rights by consolidating. This is most clearly a problem if you consolidate federal loans into a private consolidation loan (you would lose the rights associated with federal loans). You may also lose some options and protections if you consolidate certain federal loans, particularly Perkins loans, into other federal loan programs.
- Parent PLUS borrowers who also have other federal student loans and choose to consolidate with Direct Loans will find that the PLUS loan taints the entire consolidation loan and will mean that they will not be eligible to repay the consolidation loan using IBR. If they wish to consolidate, parent PLUS borrowers may exclude the PLUS loans from the consolidation and pay them separately. These borrowers should also be able to consolidate and choose ICR.
- Consolidation allows you to put all of your loans together and make just one monthly payment. This is not as useful as it used to be for most borrowers since nearly all new federal loans are made through the Direct Loan program. The Department of Education says it is trying to place borrowers with multiple Direct loans with a single servicer.
- Consolidation might help you if you need to reduce payments on your loan through an extension of the repayment period. (Extending the length of repayment increases the total amount you have to repay over the life of the loan.)
- You may get an interest rate break, especially if you have variable rate loans.
- Consolidation is one way to get out of default and back into current repayment.
As you weigh the pros and cons, keep in mind that timing is critical. With just a few exceptions, you get only one chance to consolidate with the government loan programs.
WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender.
Federal Government Consolidation Loans
Direct consolidation loans are now the only type of federal student consolidation loan. Under the Direct Loan Consolidation Program, you can consolidate Subsidized and Unsubsidized Stafford Loans, Supplemental Loans for Students (SLSs), Federally Insured Student Loans (FISLs), PLUS Loans, Direct Loans, Perkins Loans, Health Education Assistance Loans (HEALs), and just about any other type of federal student loan. Loans that are not eligible for consolidation include state or private loans that are not federally guaranteed.
Although all of these different loans may be consolidated, you must have at least one outstanding FFEL or Direct Loan to obtain a Direct Consolidation Loan. This means, for example, that a Perkins Loan on its own cannot be consolidated into a Direct Loan.
You may consolidate with Direct Loans during grace periods, once you have entered repayment, or during periods of deferment or forbearance. Borrowers in default may also consolidate in certain circumstances.
Consolidation was previously available to borrowers while they were still in school. Congress eliminated this right in 2006. Congress also eliminated joint consolidation for spouses, effective July 1, 2006. (see box below),
You can consolidate during grace periods. This may lead to a lower interest rate on a Direct Consolidation loan, but only if you are consolidating variable rate loans. However, once you consolidate, you lose any remaining grace period. You will generally receive your first bills within 60 days after the new Direct Consolidation loan is made. The good news is that the Department explains on its web site that if any loan you want to consolidate is still in the grace period, you can delay entering repayment on your new Direct Consolidation Loan until closer to your grace period end date. You can indicate this when you apply, and the consolidation servicer will wait to process your application until the appropriate time.
APPLYING FOR DIRECT LOAN CONSOLIDATION
All borrowers must now apply for Direct Loan consolidation using the studentloans.gov web site. (Click espanol to find a Spanish version of the on-line application). The Department strongly encourages borrowers to apply on-line, but you may also download and print a paper application to submit by regular mail. The Department says it will continue to work with borrowers whose applications were submitted before the new system went into effect. Borrowers with questions prior to consolidating should be able to get help by calling 1-800-557-7392. You can also try calling the general Student Loan Support Center at 1-800-557-7394. After submitting an application, borrowers should contact the servicer they selected with any questions.
Using Studentloans.gov: You will need to sign in using your personal identifiers and PIN. The electronic application consists of five steps:
1. Choose loans and servicer. (You must select a servicer. You have four different “consolidation servicers”: FedLoan Servicing (PHEAA), Great Lakes, Nelnet and Sallie Mae (now called Navient).
If may make this choice on-line or if you are sending in a paper application, you should send directly to the servicer you choose. It is hard to know which servicer to choose. The Department provides some general information about servicer performance in the on-line data center and in quarterly performance reports.
2. Repayment Plan Selection
3. Terms and Conditions
4. Borrower and Reference Information, and
5. Review and Sign.
You will get a summary sheet after you apply. It is very important to review this sheet and check to make sure all of the loans you wanted to consolidate are included in the new consolidation loan. Be sure to meet the deadline for responding if you think there are problems with the consolidation or if you have decided you do not want to go forward.
Joint Consolidation Loans
Prior to July 1, 2006, married borrowers could choose to consolidate federal student loans from both spouses or jointly consolidate the loans of either spouse. Both borrowers had to agree to be jointly and severally liable for repayment. (“Joint and several liability” means that both borrowers are fully liable for the full amount of the debt). This obligation continued even after divorce. Not surprisingly, this caused a lot of problems for borrowers and Congress eliminated the program as of July 1, 2006.
There are still many borrowers struggling with joint consolidation loans. There are numerous problems that can arise–for example, if one of the divorced ex-spouses wants to apply for IBR. The Department says that borrowers with joint consolidation loans may repay under the IBR/PAYE plan as long as both spouses qualify with partial financial hardships. Both spouses are jointly liable for the loan and both must request IBR. Problems often arise if the ex-spouses are no longer in contact.
Another common problem is that partial discharge of a joint consolidation loan under any of the discharge programs (other than death discharge) does not eliminate joint liability for the remaining balance. Further, borrowers with joint FFEL consolidation loans, according to the Department, may not reconsolidate into Direct Loans and therefore are not eligible for public service loan forgiveness.
Loan Terms, Fees, and Limits
Interest rates for consolidation loans are fixed. The fixed rate is based on the weighted average of the interest rates on the loans at the time of consolidation, rounded up to the nearest one-eighth of a percentage point. The interest rate must not exceed 8.25% for consolidation loans prior to July 2013. However, the interest rate may be greater than 8.25% if your consolidation application was received on or after July 1, 2013.
Consolidation loan borrowers should not be charged origination fees.
Only One Chance
If you already have a consolidation loan with either FFEL or Direct, you are not allowed to “reconsolidate’, except in limited circumstances.
These circumstances are:
- If you have an eligible loan that was not included in the first consolidation and you include that loan in the new consolidation. The eligible loan could be a new loan you received after the initial consolidation loan. It could also be another consolidation loan, or
- FFEL consolidation borrowers may obtain a Direct consolidation loan if the loan is in default or has been submitted to a guaranty agency for default aversion and if you agree to repay under the Income Contingent Repayment plan or Income Based Repayment, or
- You can “re-consolidate” if necessary to participate in the Direct Loan public service forgiveness program. It is a good idea to do this even if you just think that you might want to use the public service cancellation program. The sooner your payments start counting toward the ten year cancellation period, the better, or
- Military service members are also allowed to re-consolidate to take advantage of the limits on interest accrual for Direct Loans.
Private Consolidation Loans
Borrowers cannot consolidate private student loans with the federal consolidation loan programs. However, if you have private loans, you may want to think about consolidating these loans into a new private consolidation loan. This may be a good idea if you want a single monthly payment. You may also be able to get a better deal if, for example, your credit score is better now than it was when you first took out the private loans.
WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender. These include deferment, forbearance, cancellation, and affordable repayment rights. Also, federal consolidation loans generally have lower interest rates.