Student Loan Consolidation

Former students can leverage economies of scale by consolidating their federal loans into a single monthly payment. This process helps students save on interest expense, and provides the convenience of managing only one student loan each month.

Loan Consolidation

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

Eligibility Rules

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

Borrowers that have been delinquent in paying back their federal student loans may not be immediately eligible for consolidation.  If that is the case, the holder of the loan can explain what corrective actions can be taken to become eligible once again.

In order to get a Direct consolidation loan, the borrower needs to include at least one FFEL or Direct Loan.  If there is only a FFEL loan outstanding, the borrower must first contact a lender that provides FFEL consolidation services.  If the borrower is not eligible under their program, or it's not possible to get a loan that has acceptable income-sensitive repayment terms, the borrower should then determine if they are eligible for an income sensitive repayment plan under the Direct consolidation loan program.

Loans Eligible for Consolidation

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

  • Direct Subsidized and Unsubsidized Loans
  • National Direct Student Loans
  • Direct and Federal PLUS Loans
  • Federal Subsidized and Unsubsidized 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

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

Ineligible Loans

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 are not guaranteed by the federal government
  • Loans made by a private lender that are not guaranteed by the federal government

Pros of 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 term of the loan.  By extending the time over which the loan is repaid, the borrower can lower their monthly payments.

Loan Example 1

Haley is a former student with loans of $10,000, carrying a 7.0% interest rate, and a term of ten years.  Her monthly payments are $116.11.  By consolidating her loan, she is able to extend the repayment period.  That same loan with a 20 year term would result in payments of $77.53 per month, which is a savings of nearly $50.

Saving Money on Loans

It's also possible to save money by taking advantage of lower interest rates.  If rates have gone down since the loan was written, lenders can offer a lower rate of interest on the consolidated loan.

Borrowers can also save money by prepaying their loan.  By prepaying an additional portion of the principal each month, it's possible to shorten the life of the loan and lower the cost of borrowing money.

Cons of Consolidation

While extending the term of the loan can save on monthly payments, this is a costly option.  By extending the term over which the money is borrowed, the overall cost of the loan will be significantly higher.

Loan Example 2

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

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

Anyone that would like to run through similar scenarios can use the Simple Monthly Loan Calculator found on this website to see the impacts of switching to a consolidated loan.

Student Loan Consolidation 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 rates on all the loans, and uses a weighted average to determine the interest rate that would apply to the combined loan.  Once the former student agrees to this interest rate, it remains fixed for the term of the loan.  While this protects the student from future increases in rates, it also prevents them from taking advantage of future decreases too.

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

Once the borrower has accepted the terms and conditions of the new loan; the program does not allow borrowers to unwind the transaction.  Funds from the consolidation process are used to pay off all existing loans.

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 former students through the decision and application process.  Run by the Department of Education, the website has additional information on repayment periods, terms and conditions, tips, checklist tools, and even the forms used to apply for a consolidation loan.


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