Student Loan Consolidation Programs

College student.Consolidation loans allow borrowers (students and parents) to combine several loans into one loan. There are two types of Consolidation Loans: Direct Consolidation Loans and FFEL Consolidation Loans.

FFEL Consolidation loans are made by private FFEL participating lenders while Direct Consolidation Loans are made by the U.S. Department of Education. Consolidation Loans can be Subsidized or Unsubsidized depending on the loans you are consolidating.

Interest rates for Consolidation Loans are fixed and based on the weighted average of the loans to be consolidated. Interest rates are rounded up to the nearest one-eight (1/8th) of one percent (0.125%) and are capped at 8.25%.

Consolidation Loan Program features:

  • Convert multiple loans and payments into one loan with one monthly payment
  • From 10 - 30 years to repay, monthly payment may be lower (life-time cost of loan may be higher)
  • Fixed interest rate - average of consolidated loans, max = 8.25%
  • Direct Consolidation Loans (U.S. Dept. of Education) or FFEL Consolidation Loans (private lenders)
  • Subsidized or Unsubsidized based on the types of loans you are consolidating

Should You Consolidate?

Benefits and potential costs of consolidation:

While consolidating multiple student loans with multiple repayment schedules allows you to simplify repayment of your school loans, there are limitations and potential negatives.

Negatives of Loan Consolidation:

  1. Increased total cost -- if you pay off your loans over a longer period of time, you may significantly increase the interest paid (up to double that of the original loans or more)
  2. Loss of individual loan benefits -- discharge benefits (Perkins Loans), interest rate discounts for individual loans, etc.

Positives of Loan Consolidation:

  1. Lower payments -- paying over longer period of time may lower monthly payments
  2. Fixed Interest Rate
  3. Simplify repayment with one monthly bill/payment

Comparison of consolidating and not consolidating your existing student loans:

Applying for a Federal Consolidation Loan

FFEL and PLUS Loans can be consolidated during repayment, grace periods, deferment or forbearance and even if in default (in special circumstances).

Steps to obtaining a Consolidation Loan:

  1. FFEL Consolidation Loan Program:
    • Contact a participating FFEL lender (bank, financial institution, etc.)
  2. Direct Consolidation Loan Program:
More resources for Student Loan Consolidation