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Frequently Asked Questions about Consolidation

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The following is a list of common questions about student loan consolidation. These are genericized versions of actual questions received through FinAid's free Ask the Aid Advisor service.

  1. Are there any minimum balances required to consolidate?

    The Federal Direct Consolidation Loan Program does not have a minimum balance requirement. (When FFELP lenders were able to consolidate federal education loans, some lenders required a minimum balance of $5,000 or $7,500. Since July 1, 2010, only the direct loan program has been able to consolidate federal education loans.)

  2. Does consolidation affect my credit rating?

    No. Education debt is considered "good debt", as it represents an investment that generally increases your ability to earn money to repay debt. Even though consolidation may increase the term of the loan, it does not appreciably change repayment behavior. (Defaulting on your education loans, on the other hand, will negatively impact your credit rating.)
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  3. How do I go about consolidating my loans?

    Visit the federal direct consolidation loan web site at loanconsolidation.ed.gov to consolidate your loans. This is a self service web site that allows borrowers to consolidate their loans online. Borrowers can also call 1-800-557-7392 (TDD 1-800-557-7395).

    The US Department of Education will then contact the lenders to determine loan payoff amounts and issue a new consolidation loan to pay off the loan balances on the borrower's existing loans.

    Until you receive notification that your original loans have been paid off, continue making payments on those loans. You don't want to go into default on those loans, since that would prevent your consolidation loan application from moving forward.

  4. Are there any ways to save money through consolidation?

    Previously, some lenders would offer small discounts as an incentive for borrowers to consolidate with them. Most lenders stopped offering discounts during the subprime mortgage credit crisis. Since July 1, 2010, all new federal consolidation loans have been made through the direct loan program, so there is no longer any competition among lenders to attract borrowers. However, the federal direct consolidation loan program offers a 0.25% interest rate reduction for borrowers who agree to repay their loans through auto-debit.

    Before July 1, 2006, federal education loans had variable rates. A consolidation loan was a useful tool for locking in the current rate on a variable rate loan. Consolidation loans earned a reputation for saving borrowers money because locking in the interest rate prevented the interest rate from rising. Lenders would compare the locked in rate with the maximum possible interest rate or the historical average interest rate. However, since July 1, 2006 all new federal education loans have had fixed rates. Consolidation is no longer needed to lock in the interest rate, since the interest rates are already fixed. Thus consolidatiton does not save money. (Some borrowers consider consolidation loans to save money because the borrowers can then choose an extended repayment term, which reduces the monthly payment. But this comes at a cost of increasing the term of the loan, which increases the total interest and total payments over the life of the loan. For example, if a borrower switches the repayment term on an unsubsidized Stafford loan at 6.8% interest from 10 years to 20 years, it cuts the monthly payments by about a third, but more than doubles the total interest paid over the life of the loan.)

  5. Can parents consolidate PLUS loans? Should they?

    Yes, parents can consolidate PLUS loans. Consolidating a PLUS loan can yield some savings if the Parent PLUS loan has an 8.5% interest rate, since consolidation reduces the interest rate from 8.5% to 8.25% due to the cap on the interest rates of consolidation loans. However, one must consider the impact of consolidation on available student loan discounts.

    Since July 1, 2010, all new PLUS loans have had a 7.9% fixed rate, so consolidation does not reduce the interest rate on more recent PLUS loans. In fact, it will increase the interest rate from 7.9% to 8.0%.

  6. I have just one loan. Can I consolidate?

    Yes, so long as the loan being consolidated is not itself a consolidation loan. To reconsolidate a consolidation loan, you must be including additional loans. Otherwise, you can consolidate even just a single loan.

  7. I consolidated a few years ago. Can I consolidate again?

    Consolidation loans may only be reconsolidated when you are adding more loans to the consolidation. If you do not have other federal education loans to include in the new consolidation loan, you cannot reconsolidate a consolidation loan unless you are consolidating the loans to move them from the FFEL program to the direct loan program. Note that reconsolidating a consolidation loan does not relock the interest rates on the loan.

  8. I have not yet graduated. Can I consolidate my loans?

    No. The early repayment status loophole was repealed, effective July 1, 2006. In addition, the ability of Direct Loan borrowers to consolidate during the in-school period was also repealed on this date. You can only consolidate during the grace period or after your loans enter repayment. (If you drop below half time enrollment status, your loans will be eligible for consolidation. Summer enrollment and accelerated programs, however, generally do not qualify you to consolidate your student loans.)

  9. I qualified for a 2.25% discount on my unconsolidated Stafford loans (i.e., 0.25% interest rate reduction for direct debit and 2% interest rate reduction after 48 months of on-time payment). If I consolidate, will I lose these benefits? Is it still worthwhile to consolidate?

    A consolidation loan is like a refinance. It is a new loan that pays off the original loans. The new loans does not have any of the special discounts that were provided on the original loans. If you consolidate your loans, you will lose any existing loan discounts.

    To determine whether it is worthwhile to consolidate, you need to compare the value of the loan discounts you will get if you consolidate with the value of the loan discounts you retain if you don't consolidate.

  10. I don't remember who my lender is. Help!

    The financial aid administrator at your college may be able to help. You can also look up your lender online. See FinAid's Lost Lender page for information about the National Student Clearinghouse's Loan Locator service and the NSLDS Student Access.

  11. Can I consolidate private education loans? Can I consolidate my Federal and private loans together?

    You cannot consolidate private education loans into the Federal consolidation loan program. However, some lenders offer private consolidation loans for those loans. We do not recommend including federal education loans in a private consolidation loan, as this often increases the interest rate. You will also lose several important benefits of the federal education loans, such as flexible repayment terms and generous loan forgiveness and cancellation provisions. Consolidate your federal loans separately, with the federal consolidation loan program.

    Note that in most cases the private consolidation loan is a variable rate loan, so you aren't locking in a lower rate, just switching lenders. The new loans will have a new variable interest rate based on the borrower's current credit score.

    However, if a borrower has been in repayment for a few years and has been making all payments on time as per the agreement, their credit scores may have improved. This may allow a borrower to consolidate to get a better interest rate. (Typically, a borrower's credit scores decrease with each year in school, since each year brings a higher loan balance.)

    Some borrowers will seek a private consolidation on their own as a form of cosigner release. The new loans, which does not include a cosigner, pays off the old cosigned loans, effectively releasing the cosigner from the obligation to repay the loans. (Some lenders offer a cosigner release option which will release the cosigner from the obligation to repay the debt after 12, 24, 36 or 48 months of on-time payment, provided that the primary borrower satisfies credit criteria. Borrowers report that it is difficult to qualify for cosigner release.)

    There is at least one lender that offers a fixed rate private consolidation loan, but only to low-risk borrowers. (In general, lenders offering consolidation loans are concerned about adverse selection, where a borrower who is struggling to repay his or her loans believes that consolidation will solve the problem. The last thing any lender wants is to "buy" a default.)

 

 
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