Consolidation is similar to refinancing a loan. You can consolidate all, just some, or even just one of your student loans. Consolidating with one of the federal loan programs may be a good strategy to lower monthly payments or to get out of default, but it is not always a good idea.

Until July 1, 2006, interest rates on federal loans were variable, changing according to a formula every July 1. Consolidation would lock in a fixed rate based on the average rates of all the loans included, creating one loan with a single rate, and often, significant savings in interest over the life of the loan.  Non-consolidation loans made after July 1, 2006 have a fixed interest rate, so consolidating newer loans may not save much in interest.  You should check the interest rates on your loans, particulary if you have a subsidized loan that you took out after 2008, because rates are lower on these loans.  The Department of Education has compiled information about interest rates for federal Stafford, PLUS, and consolidation loans for the period July 1, 2010 – June 30, 2011.  These Department of Education charts contain even more information about interest rate calculations.

Pros and Cons of Consolidation

The “Cons”

1. If you have relatively new loans, you probably won’t save as much on interest through consolidation. This is because interest rates on federal loans made after July 1, 2006 are 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.  The interest rate (valid through June 30, 2011) for loans first disbursed between July 1, 1998 and June 30, 2006 is 2.47% for loans in repayment.  You can get an even lower rate of 1.87% if you consolidate during your grace period.  These low rates will be locked in for the remaining life of the loan.  The Department of Education has compiled this information about interest rates for July 1, 2010 through June 30, 2011
2. 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.
3. 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.

The “Pros”

1. Consolidation allows you to put all of your loans together and make just one monthly payment.
2. 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.)
3. You may get an interest rate break, especially if you have variable rate loans.

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. These include deferment, forbearance, cancellation, and affordable repayment rights. Federal consolidation loans generally have lower interest rates.

Federal Government Consolidation Loans

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. If the “qualifying” loan is a FFEL loan, you must also certify that you were unable to obtain FFEL Consolidation or unable to obtain a FFEL Consolidation Loan with acceptable income sensitive repayment terms.  This certification should no longer be a problem since as of July 1, 2010, the FFEL program is no longer in existence.

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. However, you can consolidate during grace periods. Congress also eliminated joint consolidation for spouses, effective July 1, 2006.

ALERT:  Due to recent legislation, certain borrowers in an in-school status may once again consolidate their loans.  This option is only available for Direct Consolidaton loan applications received on or after July 1, 2010 and before July 1, 2011.  Borrowers may consolidate loans that have not yet entered repayment status if they meet the following requirements:  1.  They have one or more loans from two or more of the following categories:  i)  FFEL program loans that are held by an eligible lender; ii)  FFEL Program loans that have been purchased by the Department of Education; and iii)  Direct Loans.  2.  The borrower has not yet entered repayment on one or more of the loans in any of the categories listed in #1 above.  3.  The borrower is not consolidating any loans other than loans from the categories listed in #1 above.  Borrowers should be advised that there will be no grace period on these consolidation loans.  In this announcement, the Department describes ways to deal with this potential problem.

You can apply on-line for a consolidation loan. For Direct Loans, click here. You can also use this self-packet to help you apply for a Direct Consolidation loan.

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%.

Consolidation loan borrowers should not be charged origination fees.

Only One Chance

Under new rules passed by Congress in 2006, if you already have a consolidation loan with either FFEL or Direct, you will not be able 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.
• 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.
• Military service members are also allowed to re-consolidate to take advantage of the new 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.