Federal Loan Consolidation

There are many options and methods to manage your student loan repayment. We suggest talking with your lenders to find the loan repayment option that works best for your situation. It is important to know all your options. Federal loan consolidation is one of several federal loan repayment options.

The Federal Loan Consolidation Program was designed to simplify loan repayment for borrowers by combining several types of federal education loans into one new loan (held by one lender) with a fixed interest rate. Federal educational loans include Stafford , Graduate PLUS and Perkins loans. Federal loan consolidation can only occur after graduation or separation from the school.

Note: For all Stafford loans that were disbursed prior to June 30, 2006, the interest rate is variable, with a cap at 8.25%. You can contact your lender to determine the interest rate for federal Stafford loans that disbursed prior to June 30, 2006. All loans that were processed for the 2006-07 academic year and beyond are at a 6.8% fixed interest rate.

The first step for borrowers who are considering federal student loan consolidation is to verify the accuracy of their personal student loan records. The National Student Loan Data System (NSLDS) , the U.S. Department of Education's central database for student aid, is an excellent resource. If you have a U.S. Department of Education PIN you will be able to access your federal loan data online. (If you completed the FAFSA online and signed electronically then you have a PIN. If not, or if you have lost or forgotten your PIN, one can be obtained through the Federal Student Aid PIN Registration ) It is essential to have all of your loan details gathered, including the current balance, interest rates and lenders, prior to initiating the consolidation process.

When a borrower consolidates federal loans, the borrower can choose to consolidate some or all of their federal student loans. These loans are combined into a new loan and the interest rate for a consolidation loan is the weighted average of all the loans consolidated rounded up to the nearest 0.125%, not to exceed 8.25%.

If you have a variety of loans and are considering loan consolidation, you can calculate your weighted average by using the Loan Consolidation Worksheet at Mapping Your Future . You can also calculate your monthly payments at this site by using the Student Loan Calculator . The Mapping Your Future website is a helpful resource as it offers a number of useful services to student loan borrowers.

Details on loan consolidation are outlined on both lenders' websites and through the Department of Education . Students are highly encouraged to talk with their lenders to discuss repayment options. Student can either consolidate with a lender or directly with the government through Federal Direct Consolidation. Only students that consolidate through Federal Direct Consolidation can be eligible for the federal public service loan forgiveness plan from the College Cost Reduction and Access Act of 2007.

Issues to Consider before Consolidating Federal Student Loans

Borrowers have a 6-month grace period after they leave school during which interest does not accrue and payments are not required on their subsidized Stafford Loans. The grace period is 9-months for Perkins Loans, which is also a subsidized loan.
Loan consolidation provides the option to borrowers of repaying their loans over a longer period of time. If you select an extended repayment, you may end up paying more in interest costs.
If you have borrowed a Perkins Loan, there are a number of reasons why you might not include the Perkins Loan if you do decide to consolidate:

Students with Perkins loans are not responsible for the interest enrolled at least half-time or during the 9 month grace period after graduation. If you consolidate the Perkins Loan during your grace period, you lose this interest subsidy, meaning the loans will collect interest once the consolidation is complete.
Consider the impact of the Perkins Loan on the interest rate for the consolidation loan as it is a weighted average. (The Perkins Loan has a fixed interest rate of 5%.)
Perkins Loans will also lose other cancellation benefits upon consolidation. (To view the loan forgiveness programs and the loans they are associated with, visit Mapping Your Future.)

For additional information about loan consolidation, including consolidation specifics, common questions and examples, refer to the Federal Student Loan Consolidation Guide (pdf).