Student Loan Consolidation
Many students
and parents are wondering if it is beneficial to consolidate
educational loans to take advantage of these new low rates.
The answer is…it depends.
The Federal Consolidation Loan Program was established by Congress
to help students manage federal student loan debt. Federal Consolidation
Loans give borrowers (both students and parents) the opportunity
to simplify repayment by combining federal loans into one convenient
monthly payment. To qualify, borrowers must have at least two
federal student loans. While most traditional student loans
are paid in full over the course of a ten-year period, repayment
terms on consolidation loans can extend from ten to thirty years,
depending on the amount of the loan. The interest rate on a
consolidation loan is a fixed rate for the entire term of the
loan equal to the weighted average interest rates of the outstanding
loans, rounded up to the nearest 1/8th percent, or 8.25 percent,
whichever is less.
Furthermore, if loan consolidation is done during the loan
"grace" period -- typically the six months after graduation
when borrowers are not required to begin repayment -- the interest
rate will be based on a weighted average of lower in-school
interest rates. Since the first payment on a consolidation loan
is due within 60 days of disbursement, borrowers who are in
a grace period and want to maximize their deferment benefits
should submit applications for loan consolidation as close to
the end of their grace period as possible.
From January 1 - June 30, 2012, students with a Stafford Loan from a bank and a Federal Direct Stafford Loan will be eligible for a Special Direct Consolidation Loan.
How will the Special Direct Consolidation Loan Process work?
- Special Direct Consolidation Loans are not the same as traditional consolidation loans that borrowers can apply for today.
- Only certain borrowers will be eligible for Special Direct Consolidation Loans.
- Eligible borrowers will be contacted by one of four federal loan servicers starting in January 2012. Given the number of eligible borrowers, these contacts will occur over several weeks.
- The servicers that will contact eligible borrowers are FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae.
- The servicers will provide eligible borrowers with application instructions.
- After receiving application instructions from a servicer, eligible borrowers will apply through a new and different online process.
- Borrowers who may be eligible must not apply through the traditional Direct Consolidation Loan Web site (http://loanconsolidation.ed.gov).
What loans must a borrower have to be eligible for a Special Direct Consolidation Loan?
- At least one ED-held Direct Loan or ED-held FFEL loan and one commercially-held FFEL loan.
What loans are eligible for Special Direct Consolidation?
- Only commercially-held FFEL loans (subsidized, unsubsidized, PLUS, and consolidation).
- Commercially-held FFEL loans must be in grace, repayment, deferment, or forbearance.
- Commercially-held FFEL loans can be defaulted loans that have been rehabilitated.
- Commercially-held FFEL loans cannot be in default or subject to a bankruptcy proceeding.
What will a borrower gain by obtaining a Special Direct Consolidation Loan?
- One servicer and one payment, as opposed to one or more servicers with multiple bills and varying repayment requirements.
- For commercially-held FFEL loans that will be consolidated, a 0.25 percent reduction from each loan's existing interest rate at the time of consolidation, plus the opportunity to receive an additional 0.25 percent interest rate reduction if automatic debit is chosen for repayment.
- For commercially-held FFEL loans with a variable interest rate at the time of consolidation, the conversion to a fixed interest rate at the lower percentage that will not change over time.
- No loss to previous time in repayment; it will count towards the repayment term for the new loan.
- No loss to previous Income-Based Repayment (IBR) payments; they will count towards the required repayment time for cancellation if the borrower remains in IBR.
- The commercially-held FFEL loans that will be consolidated will be eligible for discharge under the Public Service Loan Forgiveness Program.
Additional information is available on the Special Direct Consolidation Loans web page.
Once
the consolidation loan is disbursed, borrowers may forfeit any
time remaining in their grace period.
By law, lenders cannot charge fees or run credit checks to
process student consolidation loans. Borrowers have a choice
of several repayment schedules: standard payments are fixed
monthly payments which extend over a set period of time; graduated
payments start out low and increase every two years; income-sensitive
payments are variable payment amounts based on annual income;
and extended payments are available for large loans. Borrowers
may change repayment plans at any time. Consolidation, however,
is a one-time process. It cannot be done again unless there
is a new loan to be included.
Obviously, the major benefits of loan consolidation are one
lender, lower monthly payments, and a fixed interest rate. Students
and parents should be aware that loan consolidation generally
extends the repayment period and, in the long run, may result
in increased finance charges over the lifetime of the loan. There are, however, no prepayment penalties on Federal Consolidation
Loans, so interest costs can be reduced by paying off the loan
early. Students should also take into account that Federal Consolidation
Loans have fewer deferment, cancellation, and forgiveness options
than some original student loans.
Students
considering full-time graduate or professional school should
investigate deferment options before entering into loan consolidation.
While payments may be deferred
during periods of school enrollment, interest will accumulate
on the consolidation loan.
Borrowers with loan balances of $30,000 or more may be able to extend the repayment period up to twenty-five years without consolidating.
Borrowers with Perkins Loans should carefully weigh the advantages
and disadvantages of including these loans in a consolidation
package, since Perkins Loans offer special benefits such as
100 percent cancellation for employment in certain fields and
an interest subsidy. Borrowers
forfeit these benefits once they enter into a consolidation
loan. Also, because the
interest rate on Perkins Loans is 5 percent, the inclusion of
Perkins Loans in the consolidation loan may have a negative
impact on the calculated average used to determine the interest
rate on the consolidation loan.
Parents who obtained Federal Parent Loans for Undergraduate
Students (PLUS) to help their children through their undergraduate
years are also eligible to apply for Federal Consolidation Loans.
Although rates are higher than those offered to student borrowers,
parents can still obtain attractive fixed rates, depending on
when the variable loan was disbursed. PLUS borrowers must pass
a credit check as part of the consolidation process. Parent
PLUS Loans cannot be consolidated with the dependent student's
loans.
The following
loans that are eligible for consolidation through
the Federal Consolidation Loan Program:
· Federal Stafford Loans, subsidized
and unsubsidized, including Guaranteed Student Loans
· Federal Supplemental Loans for Students (SLS)
· Federal Perkins Loans (NDSL)
· Federal Direct Loans
· Health Professions Student Loans, including Loans for
Disadvantaged Students (HPSL)
· Health Education Assistance Loans (HEAL)
· Federal Insured Student Loans (FISL)
· Federal PLUS (Parent) Loans
· Federal Nursing Student Loans (NSL)
In conclusion, loan consolidation can be a wise choice for
borrowers who are struggling to meet their current loan payments.
The lower monthly payments can give individuals flexibility
to better manage current monthly expenses and loan debt. Borrowers
should beware of the temptation to let loan payments drop so
low that they are only paying interest and never tackling the
principal. They should also consider the ramifications of extending
educational debt over long periods of time. With twenty to thirty
year repayment plans, individuals may still be repaying their
own educational loans while trying to put their children through
college. As salaries increase, most borrowers are advised to
accelerate their educational loan payments.
Guide to Federal Consolidation Loans
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