Student Loan Consolidation

No Cost to Consolidate

Aside from a slight increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. There are no fees to consolidate.

Under no circumstances pay a fee in advance to get a federal education loan or consolidate your federal education loans. There are no fees to consolidate your loans. While other federal education loans, such as the Stafford and PLUS loans, may charge some fees, the fees are always deducted from the disbursement check. There is never an up front fee. If someone wants you to pay an up front fee, chances are that it is an example of an advance fee loan scam.

Who Can Consolidate

Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)

Married students are no longer able to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible for the full amount of the loan, and the loans could not be separated if the couple got divorced. To avoid such problems in the future, Congress decided to repeal this provision as part of the Higher Education Reconciliation Act of 2005.

Students can only consolidate their education loans during the grace period or after the loans enter repayment. (Loans that are in default but with satisfactory repayment arrangements may also be consolidated.) Students can no longer consolidate while they are still in school. (The early repayment status loophole and the ability of Direct Loan borrowers to consolidate during the in-school period was repealed as part of the Higher Education Reconciliation Act of 2005, effective July 1, 2006.)

Parents, however, can consolidate PLUS loans at any time.

You Can Consolidate with Any Lender

Students and parents can consolidate their loans with any lender, even if all of their loans are with a single lender. (The single holder rule was repealed on June 15, 2006, as part of the Emergency Supplemental Appropriations Act of 2006. Borrowers no longer need to exploit the single holder rule loopholes in order to consolidate with any lender.) Direct Loans can also be consolidated with any lender. This allows you to shop around for a lender that offers a lower rate or better discounts.

Most lenders require a minimum balance before they will consolidate your loans. For example, many lenders will only offer consolidation loans for borrowers with loan balances of at least $7,500. A few lenders will offer consolidation loans for balances of $5,000 or more, and the Federal Direct Consolidation Loan program has no minimum balance for consolidation loans. (Lenders may not discriminate against borrowers who seek consolidation loans on the basis of number/type of student loans, type/category of educational institution, the interest rate on the loans, or the type of repayment schedule sought by the borrower. Lenders are, however, able to discriminate on the basis of the amount of the loans being consolidated, so lenders can set a minimum balance on the loans.)

Which Loans Can be Consolidated?

Any federal education loan can be consolidated. You can even consolidate a single loan. There are, however, a few restrictions on consolidating a consolidation loan.

You can consolidate a consolidation loan only once. In order to reconsolidate an existing consolidation loan, you must add loans that were not previously consolidated to the consolidation loan. You can also consolidate two consolidation loans together. But you cannot consolidate a single consolidation loan by itself. These restrictions have been in effect since early 2006.

Note that when you reconsolidate a consolidation loan, it does not relock the rates on the consolidation loan. The consolidation loan is treated as a fixed rate loan within the weighted average interest rate formula used to calculate the interest rate on the new consolidation loan. Consolidation does not pierce the veil on previous consolidations.

The new restrictions on consolidating a consolidation loan limit your ability to use consolidation to switch lenders. Generally, you will consolidate your loans once, toward the end of the grace period or after the loans enter repayment, and then be locked into that lender for the lifetime of the loan. If you want to preserve your ability to use consolidation in the future to switch lenders, you should exclude one of your loans from the consolidation.

Repayment Plans

Consolidation loans provide access to several alternate repayment plans besides standard ten-year repayment. These include extended repayment, graduated repayment, income contingent repayment (Direct Loans only) and income sensitive repayment (FFEL only). If you do not specify the repayment terms, you will receive standard ten-year repayment.

Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased.

In certain circumstances (for example, when one or more of the loans was being repaid in less than 10 years because of minimum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total amount of interest paid will decrease.

You do not need to pick an alternate repayment plan. We recommend sticking with standard ten-year repayment, because it will save you money. The alternate repayment plans may have lower monthly payments, but this increases the term of the loan and the total interest paid over the lifetime of the loan. See our caveat about extended repayment below.

No Cost to Consolidate Aside from a slight increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. There are no fees to consolidate. Under no circumstances pay a fee in advance to get a federal education loan or consolidate your federal education loans. There are no fees to consolidate your loans.

Who Can Consolidate? Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.)

Interest Rates The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.