Federal Consolidation Loans

A Consolidation Loan can help you (and your parents, if they borrowed for you) simplify loan repayment by allowing you (and your parents) to combine several types of federal student loans with various repayment schedules into one loan. The repayment process is simpler because you make only one payment a month. Also, the interest rate on the Consolidation Loan might be lower than what you’re currently paying on one or more of your loans. Even if you’re in default on a federal student loan, you might be eligible for a Consolidation Loan if certain conditions are met.

Note that a lender may not refuse to consolidate your loans because of:

• the number or type of eligible loans you want to consolidate.
• the type of school you attended.
• the interest rate you would be charged on a consolidation loan.
• the types of repayment schedules available to you.

What types of consolidation loans are there?

Direct Consolidation Loans are available from the U.S. Department of Education. FFEL Consolidation Loans are available from participating lenders such as banks, credit unions, and savings and loan associations.

There are three categories of Direct Consolidation Loans: Direct Subsidized Consolidation Loans, Direct Unsubsidized Consolidation Loans, and Direct PLUS Consolidation Loans. If you have loans from more than one category, you still have only one Direct Consolidation Loan and make only one monthly payment.

Under the FFEL Program, you can receive a Subsidized and/or an Unsubsidized FFEL Consolidation Loan, depending on the types of loans you’re consolidating. (Federal PLUS Consolidation Loans are included under the Unsubsidized FFEL Consolidation Loan category.)

What kinds of loans can be consolidated?

All the loans discussed in this website are eligible for consolidation, and others can be included. For a FFEL Consolidation Loan, a participating lender can give you a complete list of eligible loans. For a Direct Consolidation Loan, the Loan Origination Center’s Consolidation Department can give you a complete list. Contact:
 
Loan Origination Center’s Consolidation Department
1-800-557-7392
TTY users may call 1-800-557-7395.
http://www.loanconsolidation.ed.gov/

Who’s eligible for a Consolidation Loan?

You can get a FFEL Consolidation Loan during your grace period, once you’ve entered repayment, or during periods of deferment or forbearance. If you’re in default on a federal student loan, you still might be able to receive a FFEL Consolidation Loan, provided the defaulted loan is not subject to a judgment or wage garnishment. For more information, contact a lender that participates in the FFEL Consolidation Loan Program.

You can also get a Direct Consolidation Loan during your grace period, once you’ve entered repayment, or during periods of deferment or forbearance. You must consolidate at least one Direct Loan or FFEL, however. If you don’t have a Direct Loan, but you have a FFEL, you must first contact a FFEL lender who makes FFEL Consolidation Loans to ask about getting a FFEL Consolidation Loan. If you can’t get such a loan, or you can’t get one with income-sensitive repayment terms acceptable to you—and you’re eligible for the Direct Loan Income Contingent Repayment Plan—you’re eligible to apply for a Direct Consolidation Loan. If you’re in default on a federal student loan, you might be able to receive a Direct Consolidation Loan. For more information, contact the Loan Origination Center’s Consolidation Department (see above).

One difference between Direct and FFEL Consolidation Loans is that you can get a Direct Consolidation Loan while you’re in school. You must be attending at least half time and have at least one Direct Loan or FFEL in an “in-school period.” (Generally, your loan is in an in-school period if you have been continuously enrolled at least half time since the loan was disbursed.) In addition, if the school you’re attending is not a school that participates in the Direct Loan Program, at least one of the loans you consolidate must be a Direct Loan.

How can I get a Consolidation Loan?

You’ll be given more information about Consolidation Loans during entrance and exit counseling sessions at your school. For a FFEL Consolidation Loan, you can also contact the consolidation department of a participating lender for an application or more information. (Your parents should do the same thing if they want to apply for a FFEL PLUS Consolidation Loan.) If the same holder holds all the loans you want to consolidate, you must obtain your consolidation loan from that holder, unless you haven’t been able to get a loan with income-sensitive repayment terms.

For Direct Loans, you (and your parents, for a Direct PLUS Consolidation Loan) can contact the Direct Loan Origination Center’s Consolidation Department at the number and Web site address listed above.

Note that if your parents want to apply for a FFEL PLUS Consolidation Loan, no credit checks are required. If they want to apply for a Direct PLUS Consolidation Loan, they are subject to a check for adverse credit history.

How do I pay back a Consolidation Loan?

Almost all the FFEL and Direct Loan repayment plans are available to FFEL and Direct Consolidation Loan borrowers, except that Direct PLUS Consolidation Loans can’t be repaid under the Income Contingent Repayment Plan.

The payback term can range from 10 to 30 years, depending on the amount of debt being repaid and the repayment plan you select. Education loans not included in the consolidation loan are considered in determining the maximum payback period. You can repay your loans under a shorter period than the maximum allowed.

What’s the interest rate on a Consolidation Loan?

The interest rate for both Direct and FFEL Consolidation Loans is a fixed rate for the life of the loan (unlike Direct and FFEL Stafford Loans, which have a variable interest rate). So, once you consolidate, your rate won’t change, regardless of what future rates might be. The fixed rate is based on the weighted average of the interest rates on the loans you consolidate, rounded up to the nearest one-eighth of a percent. The interest rate does not exceed 8.25 percent.

Are there any disadvantages to getting a consolidation loan?

Yes, there could be. Keep in mind that consolidation significantly increases the total cost of repaying your loans. You might have a longer period of time to repay a consolidation loan, but you’ll make more payments and pay more interest. In fact, consolidation can double total interest expense. So, compare the cost of repaying your unconsolidated loans with the cost of repaying a consolidation loan.

You should also take into account whether you lose any borrower benefits offered under non-consolidated repayment plans, such as interest rate discounts or principal rebates, which can significantly reduce the cost of repaying your loans. Also, you might lose some discharge (cancellation) benefits if you include a Federal Perkins Loan in a FFEL Consolidation Loan or Direct Consolidation Loan.

Once made, consolidation loans can’t be unmade because the loans that were consolidated have been paid off and no longer exist. Take the time to study your consolidation options before you apply.