Consolidate a Student Loan

Recent graduates are often left wondering if choosing to consolidate a student loan is the right decision. A consolidation loan is designed to help both the student and parent borrower to simplify the loan repayment process. This is achieved by combining several types of federal student loans with various repayment terms into a single loan.

If you have more than one student loan, the ability to consolidate simplifies the repayment process because you will only have to make one payment each month. In addition, due to the larger size of the consolidated loan, the interest rate is frequently lower than rates offered on smaller loans.

Reasons for Consolidating a Student Loan

Additional Resources

We're going to start this topic by discussing some of the reasons why a former student might want to obtain a consolidation loan. Later on, we'll discuss how to qualify for a consolidation loan, and some of the consolidation rules you need to be aware of before applying for a loan of this type.

Some of the factors to consider when figuring out if a consolidation loan is a good choice appear in the list below:

Monthly Payments - Are you having trouble making the monthly payments on your college loans? You might want to first determine if you qualify for forbearance or a student loan deferment. If not, then you might want to consider a consolidation loan to help make those monthly payments a bit more affordable.
Multiple Payments - Are you having trouble keeping track of all your outstanding student loans? If you take out a direct consolidation loan, then you only need to worry about making one monthly payment.
Interest Rates - Take inventory of the interest rates on all your student loans, and compare them to what you might get on a consolidation loan. With a consolidation loan, your interest rate cannot exceed 6.8%, and many times the actual interest rate paid will be much lower.
Number of Payments Left - If you only have a few more payments left on your college loans, it's probably not worth consolidating. While a consolidation loan might offer you the chance to lower your monthly payments, that same loan might extend your payments well into the future.

The point here is simply this: Gather all the information you can before consolidating a loan. While the thought of lowering your monthly payments might be tempting, you need to make sure that a "consolidate" strategy is right in your situation.

Student Loan Consolidation

Sometimes the term "refinancing" is used to describe federal student loan consolidation. But unlike refinancing that occurs with a personal loan or mortgage, when you consolidate a student loan, you do not incur any additional application charges or fees. Even private lending institutions that are involved in this process make money through federal subsidies; not by charging fees to former students.

Making timely payments on a consolidated loan can be helpful to your credit rating. But it's important to note that not all federal student loan consolidation companies report payment history to all credit bureaus. This means your credit score might vary by agency.

Consolidation Interest Rates

In general, a consolidation loan will run from a low of around 5.0% to an upper limit of 6.8% for Federal Stafford Loans, and 7.9% for PLUS loans taken out by parents of students.

The exact interest rate on a consolidation loan is determined annually for all student loans. The rate is based on the 91 day T-Bill rate established during an auction held in May of each year.

Qualifying for Student Loan Consolidation

You are eligible to consolidate your student loan once you are in the grace period or in repayment on each student loan you have chosen to consolidate. When you sign the consolidation loan application, you will be agreeing to new terms and conditions.

If you're in-default of a student loan, you can still qualify to consolidate the loan if you have made satisfactory arrangements with the lending institution.

If you're now married, both you and your spouse can consolidate your individual student loans into one new loan. But be careful with this option. If either you or your spouse cannot, or refuse, to repay the loan, then the other party will be responsible for the full amount. This is very similar to co-signing a loan.

Loan Eligibility

Most federal loans are eligible for consolidation, including: Subsidized Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans, Federal Perkins Loans (formerly National Defense / National Direct Student Loans), Health Professions Student Loans, Health Education Assistance Loans (HEAL), Loans for Disadvantaged Students, and William D. Ford Federal Direct Loans (Direct).

In fact, even consolidation loans such as Subsidized Federal Consolidation Loans, Direct Subsidized Consolidation Loans, Unsubsidized Federal Consolidation Loans, Direct Unsubsidized Consolidation Loans, and Direct PLUS Consolidation Loans are eligible to consolidate.

Student Loan Consolidation Rules

Now that we know what consolidating a student loan entails, we're going to finish this topic with several simple rules you need to be aware of before going through the process:

If you have a Stafford loan, borrowers wishing to consolidate must initially approach their original Stafford loan lender. If that lender is not able to offer you a consolidation loan, or offers you a consolidation loan but it does not include an income-sensitive repayment plan that you consider reasonable, you can go through another bank, or any other federal consolidation program such as the Department of Education's William D. Ford Direct Consolidation program, or Collegiate Funding.
Federal Perkins loans cannot be consolidated without including another loan type.
Under the current consolidation program, students are allowed to consolidate once with a private lender. You can reconsolidate again but only with the Department of Education.
When you consolidate a student loan, you obtain a fixed interest rate that is based on current interest rates. Subsequent reconsolidation does not change that interest rate. This prevents borrowers from trying to "time the market" when reconsolidating.
If a student decides to reconsolidate by combining several loans into an existing consolidation loan, then a weighted average calculation will be used to determine the interest rate on the reconsolidated loan.

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