# Everything You Need to Know about Federal Consolidation Loans

on June 15, 2017

The Federal Consolidation Loan combines multiple federal education loans into a single loan, simplifying the repayment process.

Interest Rates and Fees

The interest rate on a federal consolidation loan is a fixed rate based on the weighted average of interest rates on the loans included in the consolidation loan, rounded up to the nearest eighth of a point (multiple of 0.125 percent).

The interest rate on new consolidation loans has not been capped since July 1, 2013. Before then the interest rate was capped at 8.25 percent.

There are no fees on federal consolidation loans.

To calculate the weighted average, multiply each loan amount by its interest rate and divide the sum by the sum of the loan amounts. For example, consider two loans, one at \$10,000 and 6 percent interest and one at \$5,000 and 5 percent interest. The weighted average divides (\$10,000 x 6 percent + \$5,000 x 5 percent) by (\$10,000 + \$5,000), yielding \$850/\$15,000 or 5.67 percent. Rounding this up to the nearest eighth of a point yields 5.75 percent.

Notice how the weighted average is between the highest and lowest interest rates among the consolidated loans.

The use of the weighted average more or less preserves the cost of the loans. The individual loans in the previous example involve monthly payments of \$111.02 and \$53.03, respectively, on a 10-year term, or a total of \$164.05 a month. The total interest paid over the life of the loans is \$3,322.48 and \$1,364.04, respectively, a total of \$4,686.51. The consolidation loan has a monthly payment of \$164.65 and total interest paid of \$4,758.62. The increase in costs is due, in part, to the rounding up of the interest rate.

Why Consolidate?

There are several advantages to a federal consolidation loan:

• Consolidation streamlines repayment, replacing multiple loans with a single loan

• Borrowers of a federal consolidation loan can choose a longer repayment term, leading to a lower monthly payment

• Borrowers can use consolidation to change the servicer on their federal student loans

• No credit check or cosigner is required on a federal consolidation loan

• Consolidation resets the clock on deferments and forbearances, since a federal consolidation loan is a new loan with its own deferments and forbearances

• If one or more of the loans were subject to the \$50 minimum monthly payment, consolidation eliminates the multiple minimum payments, thereby reducing the monthly payment without changing repayment plans

There also are several disadvantages to a federal consolidation loan:

• A longer repayment term leads to more payments and more interest being charged over the life of the loan. There is no requirement that borrowers choose a longer repayment term when they consolidate their federal student loans.

• If a Federal Perkins loan is included in the consolidation loan, the borrower will lose the subsidized interest benefits and certain loan cancellation options on the Federal Perkins loan. This is in contrast with the subsidized interest benefits on a subsidized Federal Stafford loan, which are preserved when the loan is consolidated.

• Borrowers who consolidate during the grace period will lose the remainder of the grace period. Servicers of Federal Direct Consolidation Loans, however, might be willing to delay the effective date of the consolidation until the end of the grace period.

• Accrued but unpaid interest will be capitalized when the loan is consolidated, causing interest to start being charged on the unpaid interest.

• After the borrower’s loans are consolidated, the borrower can no longer accelerate repayment of the highest-rate loans. You don’t have to include all of your federal student loans in the consolidation loan. You could keep the highest-rate loans out of the consolidation to let you target them for quicker repayment.

• Consolidation might increase the interest rate by as much as an eighth of a percent (0.125 percent).

• Consolidation does not really save you money, since the interest rate does not decrease. Although one can choose a repayment plan that reduces the monthly payment, this does not save money since it increases the total interest paid over the life of the loan.

• Including a Federal Parent PLUS loan with the consolidation loan eliminates the consolidation loan’s eligibility for income-driven repayment plans. If the loans entered repayment on or after July 1, 2006, the consolidation loan will be eligible for the income-contingent repayment plan (ICR) but not the other income-driven repayment plans. The Federal Grad PLUS loan is not subject to this limitation.

• Once you consolidate your loans, you cannot undo the consolidation loan.

There also were a few considerations relating to the old federally guaranteed student loans in the Federal Family Education Loan Program (FFELP). One could consolidate FFELP loans into the Direct Loan program to qualify for Public Service Loan Forgiveness. Consolidation could ensure that the borrower had a single servicer if the borrower’s loans were split among multiple servicers (e.g., one servicer for undergraduate loans and one for graduate loans). Borrowers who consolidated FFELP loans would lose the loan discounts they were currently receiving.

Consolidation could be used to lock in variable-rate federal loans at a fixed rate. All federal education loans have had fixed interest rates since July 1, 2006.

Which Loans Can be Consolidated?

Only federal education loans can be included in a federal consolidation loan. Private student loans and private parent loans are not eligible, since they are not federal education loans.

Eligible federal education loans include subsidized and unsubsidized Federal Stafford loans, Federal Perkins loans, Federal Grad PLUS loans and Federal Parent PLUS loans, as well as Supplemental Loans for Students (SLS), Nursing Student Loans, Nurse Faculty Loans, Health Education Assistance Loans (HEAL), Health Professions Student Loans and Loans for Disadvantaged Students.

Even though Federal Stafford loans and Federal PLUS loans can be consolidated together, a student’s Federal Stafford loans cannot be consolidated with their parent’s Federal Parent PLUS loans. The borrower on the consolidation loan must be the same as the borrower of the loans that are consolidated.

Married borrowers cannot consolidate their loans together for similar reasons. Congress previously allowed joint consolidations, but repealed it effective July 1, 2006 because of the problems that arose when married borrowers subsequently got divorced and the joint consolidation could not be undone.

To consolidate defaulted federal loans, the borrower must either rehabilitate the defaulted loans by make three consecutive, full and on-time monthly payments or agree to repay the consolidation loan under an income-driven repayment plan.

When Can You Consolidate?

Borrowers may consolidate their federal student loans after they graduate or drop below half-time enrollment. Thus, borrowers can consolidate only during the grace and repayment periods, not during the in-school period.

How to Get a Consolidation Loan

Apply for a Federal Direct Consolidation Loan through StudentLoans.gov.

Do not pay a fee to consolidate your federal student loans, change repayment plans, postpone payments or qualify for loan forgiveness. You can do this on your own, for free, and it is easy to do.

Repayment of Federal Consolidation Loans

Repayment of a federal consolidation loan begins within 60 days after disbursement of the consolidation loan.

Consolidation provides borrowers with access to additional repayment plans. For example, there are two types of extended repayment. Borrowers do not need to consolidate to get an extended 25-year repayment term if they have \$30,000 or more in total student loans. If a borrower consolidates his or her federal loans, the new consolidation loan is eligible for an extended repayment term based on the loan balance, as shown in this table.

 Loan Balance Repayment Term 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 or more 30 years