Federal Loan Consolidation

 

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What is Federal Loan Consolidation?

Federal Loan Consolidation combines multiple federal loans into one new consolidation loan. This allows you to simplify your repayment by having one lender and one payment. The new loan will have a fixed interest rate that is a weighted average of the interest rates on your loans rounded up to the nearest eighth of a percent, not to exceed 8.25%. In the past, consolidation was also a way to obtain a fixed interest rate; however, the interest rate on all Federal Stafford Loans is now fixed, so that is no longer an important consideration.

What loans can I consolidate?

You can consolidate any federal loans (Stafford, Perkins, GradPLUS). You cannot consolidate Harvard loans or private loans (CitiAssist, MEFA, etc.). There are other factors though to keep in mind when deciding which loans to consolidate:

  • Based on federal regulations, Perkins loans become unsubsidized when they are consolidated (you will be charged interest through your grace period and if you later put the loan into deferment). Your grace period on the loan will change from nine months to six months, and you will also lose some specific loan forgiveness options that are available only on Perkins loans.
  • If you consolidate a Direct Loan (Stafford or GradPLUS) prior to making your first 12 payments, you will lose the 1.5% upfront fee rebate you received, as you will not be making 12 on time payments (since by definition, when you consolidate your loans, each original loan is paid off in full).
  • If you consolidate a loan for which you have a repayment incentive, you most likely will lose it if you consolidate (for example, the 1.25% repayment incentive on the Citibank GradPLUS is lost when consolidated).

Should I consolidate?

When thinking about consolidating your loans, there are a few primary details to consider. 

  1. Will the new interest rate be higher than the interest rates you already have on your loans?
  2. Will you be simplifying your repayment by reducing the number of loans and lenders?
  3. Are you losing flexibility in repayment to make higher payments towards a higher interest rate loan?
  4. Due to new federal rules requiring a minimum of $30,000 in a loan program (Direct or FFELP) in order to set up an extended repayment plan, do you need to consolidate your loans into one program to take advantage of this repayment option?

How might consolidation affect my LIPP eligibility?

Consolidation in general will not affect your LIPP eligibility, even if you consolidate undergraduate loans or loans from other degree programs. You should, however, keep a record of what loans you consolidate and the original amounts to submit with your first LIPP application.

The part of consolidation that could affect your LIPP eligibility has to do with the repayment options. For LIPP purposes, you want to choose a 10-year repayment schedule (in order to maximize your LIPP assistance). Most consolidation lenders should allow you to do this, but you may want to verify that this option is available before consolidating.

Depending on the timing of your consolidation, if you are losing part of your grace period, please remember that LIPP policy will cover you if you are both required to be making payments and in a LIPP-eligible position. Therefore, if you go into repayment in September and you are working in September, you can receive LIPP assistance. However, if you go into repayment in August but will not be working until September, LIPP will not cover you until September.

With whom should I consolidate?

There are two main avenues through which to consolidate – the Direct Loan Program or the FFEL Program. The Direct Loan program is through the Department of Education, and the FFEL program can be through any other private lender. Consolidating with the Direct Loan program will guarantee that your loan will not be sold. The Direct Loan program also has a more generous income contingent plan if you plan on going into a low paying position that will not be eligible for LIPP.

The main benefit to consolidating through a FFELP lender is the repayment incentives (provided you are eligible and can achieve them), which may lead to a lower effective interest rate. There is, however, the possibility that your loan would be sold and the repayment incentives may not be honored with the new lender.

When should I consolidate?

The new federal rules also changed the timing aspects of consolidation. You can no longer consolidate while you are in school; the first day you can consolidate is the day after the last day of classes. Be aware that you will go into repayment approximately 30-60 days after your consolidation is finalized. If you decide to consolidate, you may want to wait until closer to the end of your grace period. There are no longer reasons to rush to consolidate, so you can take your time making this decision at any point throughout the repayment of your loans.

Is there any way to consolidate my private loans?

There are some companies who offer private loan consolidation; however, the terms are generally less attractive than the terms you currently have on your loans. Private loan consolidation generally allows you to put your private loans together and extend your repayment period, thus lowering your monthly payment. Overall though, you will most likely be charged a higher interest rate and pay considerably more over the life of the loan.

Last modified: September 11, 2013

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