Loan Consolidation Information

Loan consolidation is a practical, debt management tool that enables you to refinance your Federal student loans into a new, single loan with a fixed rate. At the time of consolidation, your consolidation lender pays off the outstanding balances of the loans that you choose to consolidate. The payoff amount includes the original principal amount borrowed plus any accrued interest charges.

Which loans can be consolidated?

The following Federal loans may be consolidated:

• Federal Subsidized Stafford Loans (either FFEL or Direct)
• Federal Unsubsidized Stafford Loans (either FFEL or Direct)
• Federal Consolidation Loans (either FFEL or Direct)
• Federal Supplemental Loans for Students (SLS)
• Federal Parent Loan for Undergraduate Students (PLUS)
• Graduate PLUS loans
• Health Professions Student Loan (HPSL)
• Federal Perkins Loans (formerly National Direct Student Loans)
• Loans for Disadvantaged Students (LDS)
• Nursing Student Loans (NSL)

Note: Primary Care Loans (PCL) may not be consolidated.

Why consolidate?

Borrowers may consolidate for one or any combination of reasons. The most common reasons are:

• To secure a fixed interest rate.

Stafford loans issued prior to July 1, 2006 have variable rates that are re-set on July 1.  The new rates are announced in late May.  Consolidation allows borrowers to secure an interest rate that will be unaffected by the annual rate change.

• For convenience.

Borrowers who have multiple loans at multiple loan servicers may find it easier to deal with one loan servicer.

• To access additional repayment plans that can improve monthly cash flow. Consolidation may offer borrowers more flexible repayment plans that result in lower monthly payments (though often with higher finance charges over the life of the loan.)
• To save money on overall repayment costs. 

In recent years, borrowers have opted to consolidate in order to secure a low, fixed rate on their entire Federal loan portfolio. Lower rates translate to lower monthly payments and reduced finance charges over the life of the loan. Since the interest rate on Stafford loans issued on or after July 1, 2006 is now fixed at 6.8%, this potential benefit is less likely to be a relevant factor in most consolidation decisions.

How do I consolidate?

In general, borrowers who are considering consolidation of their student loans should contact either their loan servicer(s) or the current holder(s) of their student loans.  Direct Loan borrowers may apply for either Direct Loan (DL) Consolidation or Federal Consolidation with the FFEL lender of their choice.  Please refer to the list of consolidation lenders, telephone numbers and web sites at the end of this section. Recent legislative changes have
prompted many lenders to suspend or permanently exit one or more student loan programs, including consolidations.  As these decisions are ongoing, borrowers are encouraged to contact lenders directly for the latest information.

How is the interest rate calculated?

The interest rate for any Federal Consolidation loan (DL or FFEL) is calculated by taking a weighted average of the current interest rates for the underlying loans being consolidated, and then rounding that rate to the nearest higher one eighth of one percent.  The interest rate is fixed for the life of the loan and will not exceed 8.25%.  Some lenders may offer borrower benefits, such as a reduction in the fixed rate for electronic payments or after a certain number of on-time payments. 

When can I consolidate?  When should I consolidate?

Borrowers may apply for a Federal consolidation loan once their loans are in a grace, deferment or repayment status.  Consolidation during the in-school period is no longer an option.

There is no simple answer to the optimal timing for a consolidation loan.  However, borrowers should consider several variables:

• Grace periods are forfeited in a consolidation.  Certain deferment options (particularly those that apply to pre-7/1/93 borrowers) and interest subsidies also may be forfeited in a consolidation. Consequently, borrowers may benefit from consolidating after those benefits have been exhausted.
• Borrowers with variable rate Stafford loans issued during the 7/1/98 to 6/30/06 period should consider the annual change in interest rates.  The annual rate change is announced in late May of each year and takes effect on July 1. Since the interest rate on a consolidation loan is based upon a weighted average of the current interest rates applicable to the underlying loans, borrowers may want to consolidate before a higher rate takes effect or wait until after a lower rate goes into effect.
• Personal tolerance level for loan paperwork: you may prefer the simplicity of bundling your entire loan portfolio with one lender before you start residency rather than to have the responsibility for managing paperwork with several lenders or servicers while your loans are in a grace or deferment period.  This convenience may be more important to you than any potential financial incentives that you would retain by deferring the consolidation decision.

Advantages to Loan Consolidation

• Consolidation simplifies record keeping by combining one or more types of loans into a single loan with one monthly payment, one deferment form, etc.
• Flexible monthly payment plans allow you to choose from several options and to change repayment plans as your financial circumstance change.
• Consolidation allows you to extend the loan repayment period, which may reduce your monthly payments to a more affordable level.  Lower monthly payments improve your cash flow so that you can accelerate the payment of other financial obligations with higher interest rates, such as credit cards.
• If you consolidate through the Direct Loan Program, you may receive renewed or "refreshed" deferments or additional deferments. (This benefit applies only to borrowers with an outstanding FFEL Program loan (i.e., Stafford, SLS, PLUS, or Consolidation Loan) as of July 1, 1993.)
• If you are in default on a federal education loan, you may be allowed to consolidate if you make satisfactory repayment arrangements with your current lender.
• Some lenders offer borrower incentives or benefits, such as a reduced interest rate for on-time payments or electronic payments.   Again, please note that recent legislative changes have prompted many lenders to suspend these benefits.
• Interest paid (up to $2,500) when you consolidate your loans may be taken as a deduction on your income tax return in the calendar year in which the underlying loans are paid off.

Disadvantages to Loan Consolidation

• You may lose the discount that the lender applied to the original application fees on your loans.  For example, the DL Program normally assesses a 3% application fee on Stafford loans.  However, half of this fee (1.5% of the principal amount borrowed) was waived when your loan was processed, with the presumption that you would make the first twelve months of required payments on time.  If you consolidate before the 12-month repayment expires, the additional 1.5% fee is applied to the principal balance of your loan. 
• You may substantially increase the total cost of your educational debt if you extend your repayment beyond the standard, ten-year period.
• If you include a Perkins loan in a FFEL consolidation, you will lose the interest subsidy on any future deferment periods.  In a DL consolidation, the interest subsidy is retained.
• If you include an LDS loan in a DL or a FFEL consolidation, you will lose the interest subsidy as well as the original deferment options (e.g., unlimited residency deferment).  Therefore, you are strongly advised to leave this loan out of the consolidation or to consolidate it at the conclusion of your residency training period.
• Accrued interest charges are capitalized at the time of consolidation because the refinancing lender pays off the entire underlying loan, including the principal amount borrowed plus any accrued interest charges to your individual lender(s). Therefore, you may wish to either pay down or pay off the accrued interest prior to consolidating.
• You will lose your six- or nine-month grace period and thus the interest subsidy on any subsidized loans. Many lenders still offer a six-month grace period, but by regulation they are not obligated to do so.
  

Instructions for Completing the Federal Consolidation Loan:

• You have three choices for completing the Direct Consolidation Loan (DL) Application:

• Online Application – http://www.loanconsolidation.ed.gov
  Click on "Forms and Publications".  Email the application to:       loan_consolidation@mail.eds.com
• Express Application - By phone (1-800-557-7392) if you are consolidating Direct Subsidized Stafford, Direct Unsubsidized Stafford, Direct Graduate PLUS   Loans and/or Direct Consolidation Loans.
• Paper Application – You may obtain a paper application package by calling 1-      800-557-7392.

To complete the Federal Family Education Consolidation Loan (FFEL) Application:  please refer to the list of consolidation lenders.