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 helps these students realize a savings on interest expense and provides to them the convenience of managing only one student loan each month.

Federal Student Loan Consolidation

Most federal student loan programs are eligible for consolidation, including Direct Loans, Federal Perkins Loans and PLUS Loans. Loans obtained through private means are generally not eligible to be combined with federal loans for consolidation purposes.

Loan Consolidation Eligibility Rules

Additional Resources

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 paid out.

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

If you have FFEL loans that are all 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 situation.

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 fist 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

So now that we know all about consolidating a student loan, it's time to talk about the pros and cons of a consolidated loan and what types of loans are eligible. Later on we'll talk about finding a lender.

Pros of Loan Consolidation

Most of the time, former students will consolidation 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.

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

Saving Money on Your Student Loans

You can 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, 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.

Let's go back to our prior example, where we lowered our monthly payment by nearly $50 a 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 on the loan would have been $13,933.02.

By extending the loan another 10 years we lowered our monthly payment to $77.53, however the total money paid back on the loan is now $ 18,607.17. That's a difference of $4,674.15.

If you'd like to run though 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 for your situation, you need to understand the interest rates that would apply to each loan program. Interest rates for FFEL and Direct Consolidation Loans is determined using a formula set by the federal government.

This formula simply 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, then 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 depending on your mix of loans, the interest rates on those loans and the current interest rates on these same loans. For that reason, it is very important for the 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 most people to understand. Fortunately, the student loan consolidation center can walk you through the decision and application process. You can find a good deal more information on student loan consolidation by visiting this center.

Run by the Department of Education, you will find more 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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