Confused About Loan Consolidation?
Here's clarification: When you apply for a Federal Consolidation loan, you're applying for a new loan to pay off your existing eligible student loans. If you have many different loans with many different lenders or loan servicers, consolidation may simplify the repayment process. Instead of sending loan payments to multiple places, you could make one consolidation loan payment to one lender for all of their loans. In addition, depending on the total amount you owe, loan consolidation may permit you to extend your repayment period up to 30 years, resulting in a more affordable monthly payment amount.
How It Works
The consolidating lender pays off your student loans. The lender issues a new loan that includes all of your loans that you've chosen to consolidate. You choose the repayment plan under which you wish to begin repayment of your new Consolidation loan, and you receive a new repayment schedule based on the size of your education loan debt and the loan interest rate. Your Consolidation loan interest rate is based on the weighted average of the loans you are consolidating rounded up one-eighth of 1 percent. Your interest rate can never exceed 8.25 percent.
Eligible Loans
To be eligible, you must be in your grace period or your loans must be in repayment. Some lenders will consolidate defaulted or delinquent loans that meet certain requirements. The following loans may be eligible for consolidation:
- Subsidized and unsubsidized Stafford Loans.
- Parent and Grad PLUS Loans.
- Federally Insured Student Loans.
- Federal Supplemental Loans for Students.
- Federal Perkins Loans.
- Health Professional Student Loans.
- Nursing Student Loans.
- Health Education Assistance Loans.
Private student loans and other types of credit may not be included in a Federal Consolidation loan.
Interest Rate
If you consolidate your loans, you'll be locking in a fixed interest rate for the life of the loan. Your Consolidation loan interest rate is based on the weighted average of the loans you are consolidating, rounded up the nearest one-eighth of 1 percent. Your interest rate can never exceed 8.25 percent.
Length of Repayment Period
Depending on the size of your education loan debt, you may have 10 to 30 years to repay your loans. In determining the length of your repayment period, your consolidating lender will take into account your entire education loan debts, not just those loans eligible for consolidation.
The table below displays the maximum repayment period for a Consolidation loan based on the size of your education debt.
| Total Education Debt |
Max. Term |
| Less than $7,500 |
10 years |
| $7,500-$9,999.99 |
12 years |
| $10,000-$19,999.99 |
15 years |
| $20,000-$39,999.99 |
20 years |
| $40,000-$59,999.99 |
25 years |
| $60,000 and above |
30 years |
If you owe $7,500 or more and consolidate, you may move to a 12-, 15-, 20- or even a 30-year repayment period. As a result you can anticipate a big reduction in your monthly payment. This may be a good thing, especially if you are having trouble making your current student loan payments.
On the other hand, because you're making payments over a longer period, you'll pay more in total interest for your loan in the long run. There is no penalty for prepaying a Consolidation loan. So you could pay off your loan in 15 years rather than 30 and avoid the interest costs that would come with a 30-year repayment period.
POTENTIAL PITFALLS
Although you may benefit from a Federal Consolidation loan, there are some downsides to loan consolidation that you should consider.
- Higher total interest costs. Because loan consolidation generally extends the repayment term, it may double or triple the amount of total interest you pay on your college debt.
- Potential loss of benefits by consolidating Perkins loans. You may lose interest-subsidy, deferment or loan-discharge benefits if you consolidate a Federal Perkins loan.
Potential loss of grace period. If you consolidate your education loans during the six months after you leave school or drop below half-time status, you will forfeit the remainder of your grace period unless you instruct your lender to delay processing your consolidation loan until the end of your grace period. You will be required to begin making payments within 60 days.
Consolidation resources
Use the consolidation loan calculator on our Calculators page to determine how a Consolidation loan would affect your monthly payments.
If you have any questions, contact NELA.