Student Loan Consolidation

Student loan consolidation allows former students to leverage the economies of a larger loan, by combining their federal loans into a single monthly payment.  This process helps students realize a savings on interest expense, and provides the convenience of managing only one student loan each month.

Federal Student Loan Consolidation

Most federal student loan programs are eligible for consolidation.  This includes Direct Loans, Federal Perkins Loans, and PLUS Loans.  Loans obtained through private lenders are usually not eligible to be combined with federal loans for consolidation purposes.

Loan Consolidation Eligibility Rules

As soon as a student graduates, or drops below half-time enrollment status, they are eligible to consolidate any Direct Loans or FFEL Loans that are outstanding.  Loans taken out by parents of students, PLUS Loans, are eligible for loan consolidation once they have been completely disbursed.

If you've been delinquent in paying back your federal student loans, then you may not be immediately eligible for loan consolidation.  If that is the case, then you need to contact the holder of the loan to find out what corrective actions you can take to become eligible once again.

If you have FFEL loans that are held by the same lender, then you need to work with that same lender to get a consolidation loan.  This eligibility rule holds true as long as you have been able to get an income-sensitive repayment term that is aligned with your financial capabilities.

In order to get a Direct Consolidation loan, you need to consolidate at least one FFEL or Direct Loan.  If you only have a FFEL loan outstanding, then you must first contact a FFEL lender that makes FFEL Consolidation Loans.  If that lender finds that you are not eligible for a FFEL Consolidation Loan, or you cannot get a consolidation loan that has acceptable income-sensitive repayment terms, then you need to find out if you are eligible for an income sensitive repayment plan under the Direct Consolidation Loan program.  If you are, then you can apply for a Direct Consolidation Loan.

Student Loans Eligible for Consolidation

The following student loans can be consolidated into a Direct Consolidation loan:

• Direct Consolidation Loans and Federal Consolidation Loans
• Direct Subsidized and Unsubsidized Loans
• National Direct Student Loans
• Direct PLUS Loans and Federal PLUS Loans
• Federal Subsidized and Unsubsidized Federal Stafford Loans
• Federal Perkins Loans
• Federal Insured Student Loans
• National Defense Student Loans
• Health Education Assistance Loans
• Health Professions Student Loans
• Nursing Student Loans
• Guaranteed Student Loans
• Loans for Disadvantaged Students
• Auxiliary Loans to Assist Students
• Supplemental Loans for Students

Loan identification numbers are usually assigned to each of three loan types: subsidized student loans, unsubsidized student loans, and the parent PLUS loans.

Loans Ineligible for Consolidation

The following student loan types cannot be combined into a Direct Consolidation Loan:

• Primary Care Loans
• Law Access Loans
• Medical Assist Loans
• PLATO Loans
• Loans made by a state lender that is not guaranteed by the federal government
• Loans made by a private lender that is not guaranteed  by the federal government

Pros and Cons of Student Loan Consolidation

Now that we know the types of student loans that can be consolidated, let's talk about the pros and cons of a consolidation loan.  Later on, we'll talk about finding a lender.

Pros of Loan Consolidation

Most of the time, former students will consolidate their student loans for one of two reasons:  to lower their monthly payments, or to save money over the long haul.

Saving on Monthly Payments

If all you're looking to do is to lower your monthly student loan payments, consolidating your loan can help you achieve that goal by merely extending the period of time over which the loan is repaid.

Consolidation Loan Example 1

For example, a student loan of $10,000, carrying a 7% interest rate, and a term of ten years, requires a monthly payment of $116.11.  By consolidating the student loan, you can extend the repayment period.  That same loan with a 20 year term would lower your payment to $77.53 per month, which is a savings of nearly $50 per month.

Saving Money on Your Student Loans

You can also save money on your student loan by taking advantage of lower interest rates.  If interest rates have gone down since you obtained your student loans, then you may be able to find a lender that can offer you a lower rate of interest on your consolidated loan.

You can also save money by prepaying your loan.  By prepaying an additional portion of your loan's principal each month, you can shorten the life of the loan and lower the cost of borrowing the money.

Cons of Loan Consolidation

If you decide to consolidate your student loan, and you're looking to save on your monthly payments by extending the term of the loan, then you should be aware that this is a costly decision.  By extending the term over which you're borrowing money, the overall cost of the student loan can be significantly higher.

Consolidation Loan Example 2

Let's go back to our prior example, where we lowered our monthly payment by nearly $50 per month.  To save that $50, we extended the term of that loan from 10 to 20 years.  With the original loan, the monthly payment was $116.11 and the total money paid over the course of the loan would have been $13,933.02.

By extending the loan another 10 years, we were able to lower our monthly payment to $77.53.  However, the total money paid back over the course of the loan is now $18,607.17.  That's a difference of $4,674.15.

If you'd like to run through similar scenarios with your student loan, you can use our Simple Monthly Loan Calculator to see the impacts of switching to a consolidated loan.

Student Loan Consolidation Program

To figure out which consolidation program is best in your situation, you need to understand the interest rates that would apply to each loan program.  Interest rates for FFEL and Direct Consolidation Loans are determined using a formula set by the federal government.

This formula looks at the current interest rate on all the loans you are looking to consolidate, and uses a weighted average to determine the interest rate that would apply to your consolidation loan.  Once the former student agrees to this interest rate on the consolidation loan, it remains fixed at this rate for the term of the loan.  This protects the student from increases in interest rates, but also prevents them from taking advantage of future decreases in interest rates.

The consolidation loan program rules can be complex, and depend on your mix of loans, the interest rates on the original loans, and the current interest rates on these same loans.  For that reason, it is very important for a former student to consider the term of the consolidation loan, and the total monthly payments before, and after, consolidation.

In short, make sure you are really benefiting from the consolidation loan. Once you've taken out a new loan, the program does not allow you to unwind the transaction.  That's because the funds from the consolidation loan are used to pay off all existing student loans, therefore it is impossible to apply for these loans again.

Student Loan Consolidation Center

Admittedly, the eligibility rules, student loan types, and interest rate calculations are difficult for many people to understand.  Fortunately, the student loan consolidation center can walk you through the decision and application process.   You can find more information on student loan consolidation by visiting this center.

Run by the Department of Education, you will find additional information concerning repayment periods, terms and conditions, consolidation tips, checklist tools, and even the forms for applying for a consolidation loan.

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