Federal loan consolidation allows student loan borrowers to merge several federal loans into one new loan, sometimes with a lower monthly payment.
Federal consolidation loans allow borrowers to combine several federal student loans into one loan to streamline loan repayment.
The monthly payment amount may decrease because repayment can be spread over a longer time period. Because there are no penalties for prepaying the loan in full or in part, borrowers may make larger monthly payments or extra payments if they wish. Borrowers may also change repayment plans at least once a year.
Although student and parent borrowers are each eligible to consolidate their loans, they may not consolidate their loans together. Married borrowers may no longer consolidate their loans together.
To be eligible for Federal Loan Consolidation, borrowers must have at least one loan from the Federal Direct Loan program or Federal Family Education Loan (FFEL) program that is not in an “in-school” status.
Defaulted loans may be consolidated in certain circumstances. For example, if the borrower rehabilitates the loan by making satisfactory repayment arrangements through his/her loan servicer, he/she may be eligible to consolidate the loans. Also, borrowers may rehabilitate defaulted loans by consolidating them and agreeing to repay them in the income-based repayment plan.
The interest rate on a federal consolidation loan is a fixed rate equal to the weighted average of the interest rates on the federal education loans that are being consolidated, rounded up to the nearest one-eighth of one percent.
For example, suppose a borrower has a $7,500 loan at 3.4% and a $10,000 loan at 3.86%. The interest rate on the federal consolidation loan would be
This would then be rounded up to the nearest one-eighth of a point, or 3.75%.
Since July 1, 2013, the interest rate on new federal consolidation loans is no longer capped. Previously, the interest rate would have been capped at 8.25%.
A consolidation calculator may be used to calculate the interest rate on a federal consolidation loan.
The following types of loans may be consolidated, including loans made in the FFEL program and the Direct Loan program.
Private student loans may not be included in a federal consolidation loan.
Instead, several lenders offer private consolidation loans for consolidating or refinancing private student loans. The new private consolidation loan pays off the balances on the private student loans.
The private consolidation loan has a new interest rate based on the borrower’s (and cosigner’s) current credit history. This interest rate may be higher or lower than the weighted average of the current interest rates on the borrower's private student loans. If the credit scores have improved significantly, this may lead to a lower interest rate, potentially saving the borrower money.
If a borrower’s private student loans were obtained with a cosigner, and the private consolidation loan does not involve a cosigner, consolidating the private student loans releases the cosigner from his/her obligation. This is effectively a form of cosigner release. However, since the interest rates on a private student loan usually depend on the higher of the borrower’s and cosigner’s credit scores, this may lead to an increase in the interest rate on the private consolidation loan, unless the borrower’s current credit score is better than the cosigner’s previous credit score.
While one could use a private consolidation loan to refinance federal education loans, this is generally not recommended. Usually the federal education loans have lower fixed interest rates, so a private consolidation loan may cost the borrower more. Also, federal student loans have numerous benefits and protections that are not available on most private student loans, such as generous deferments and forbearances, income-based repayment and public service loan forgiveness provisions. Federal education loans also offer death and disability discharges; only a handful of private student loan programs offer similar discharge options.
Other forms of consumer credit, such as credit card debt, mortgages and auto loans, may not be included in a federal consolidation loan.
Only one borrower’s loans may be included in a federal consolidation loan. Married borrowers may not consolidate their loans together, nor may a student’s Federal Stafford loans be consolidated with the parent’s Federal Parent PLUS loan. (A parent who has a Federal Parent PLUS loan borrowed to pay for a child’s education and a Federal Stafford loan borrowed to pay for the parent’s education may consolidate those loans together.)
Previously, married borrowers could consolidate their loans together. The Higher Education Reconciliation Act of 2005 repealed this provision, effective July 1, 2006, because of problems that occurred when the married borrowers subsequently got divorced. There was no way to unravel the joint consolidation, so the joint consolidation loans became a tie that binds beyond divorce.
Borrowers with an existing federal consolidation loan may consolidate again in a few circumstances:
Note that reconsolidating a federal consolidation loan does not relock the interest rate.
The first payment on a federal consolidation loan is due no more than 60 days from the date of disbursement. Borrowers may get a 0.25% interest rate reduction by repaying the loans through auto-debit.
The borrower may choose from several repayment plan options, including:
There are two versions of extended repayment.
The various repayment plans based on income have different eligibility requirements and have different formulas for calculating the monthly payment.
Of these, PAYER has the lowest monthly payments, followed by IBR. ICR has the highest monthly loan payments.
No, there are no fees to consolidate federal student and parent loans, including the Federal Stafford loan and Federal PLUS loan. However, if a borrower was receiving a loan discount or “borrower benefit” from a FFEL program lender, the borrower may lose that benefit upon consolidation since the discounts are not provided by the promissory note.
No, no credit check is required to consolidate federal education loans.
No, there are no early repayment penalties for a federal consolidation loan. To make extra payments, the borrower may specify “Extra payment to principal” on any prepayment.
Borrowers who are planning on making extra payments on their loans may wish to avoid consolidation. When a borrower’s loans are kept separate, the borrower can target the loans with the highest interest rates for accelerated repayment, saving money. Consolidation replaces these loans with a single loan with a single interest rate, eliminating the possibility of prepaying specific loans.
The federal Direct Consolidation Loan application can be completed online at the U.S. Department of Education’s web site, StudentLoans.gov.
Yes! Borrowers should continue making payments on their existing loans until they are notified that the loans have been paid off through the consolidation process. Consolidation can take anywhere from 30 to 90 days. It’s important that borrowers don’t fall behind on their payments. Once the consolidation is complete, the servicer will send the borrower a new repayment schedule, with the new monthly payment amount, due date and payment address.
Consolidation can take anywhere from 30 to 90 days; in rare cases, it may take longer. The process involves the transmission and processing of payoff statements, called Loan Verification Certificates (LVCs), which can take time.
Some borrowers are not eligible to consolidate their federal education loans because of a previous consolidation loan, but are locked into a high interest rate from several years ago. There are a few options for a lower interest rate for these borrowers. The main drawback is these involve refinancing into something other than a federal consolidation loan, causing the borrower to lose the benefits of a federal education loan. These include:
Even if the borrower has bad credit because of a previous loan default, his/her parents may be able to obtain one of these forms of financing at a low interest rate, making it easier for the borrower to repay his or her student loans.
Yes! Borrowers who obtain a federal consolidation loan retain all of the benefits of a federal education loan, including:
To obtain a deferment or forbearance, contact the servicer after the loan has been consolidated to request a deferment or forbearance form.
Did you know that consolidation may reset the clock on deferments and forbearances? It’s true! Borrowers who have already reached the time limit on their forbearances and deferments may reset the clock to zero by consolidating. A consolidation is a new loan, eligible for the same deferments and forbearances as the original federal education loans.
Consolidating helps borrowers manage multiple loans by replacing them with a single loan. Borrowers can also reduce the burden of federal education loan payments on their monthly budget by choosing a repayment plan with a lower monthly payment.
There are, however, some reasons why borrowers might not want to consolidate their loans.
Depending on the total amount of your consolidation loan, the government has set the following repayment periods:
|Loan Balance||Repayment Period|
|Less than $7,500||10 years|
|$7,500 to $9,999||12 years|
|$10,000 to $19,999||15 years|
|$20,000 to $39,999||20 years|
|$40,000 to $59,999||25 years|
|$60,000 and above||30 years|
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