Everything You Need to Know About Federal Consolidation Loans

The Federal Consolidation Loan combines multiple Federal Education Loans into a single loan, simplifying the repayment process. Read on for everything you need to know about the Federal Consolidation Loan application and payment process.

Interest Rates and Fees

The interest rate on a Federal Consolidation Loan is a fixed rate based on the weighted average of interest rates on the loans, rounded up to the nearest eighth of a point (multiple of 0.125%). The interest rate on new consolidation loans has not been capped since July 1, 2013. Before then, the interest rate was capped at 8.25%. There are no fees on Federal Consolidation Loans.

To calculate the weighted average, multiply each loan amount by its interest rate and divide the sum by the sum of the loan amounts. For example, consider two loans, one at $10,000 with six percent interest and one at $5,000 with five percent interest.

The weighted average divides (10,000 x 6) + (5,000 x 5) by (10,000 + 5,000), yielding $850/$15,000 or 5.67%. Rounding this up to the nearest eighth of a point yields 5.75%. Notice how the weighted average is between the highest and lowest interest rates among the consolidated loans.

The use of the weighted average preserves the cost of the loans. The individual loans in the previous example involve monthly payments of $111.02 and $53.03, respectively, on a 10-year term, or a total of $164.05 a month. The total interest paid over the life of the loans is $3,322.48 and $1,364.04, respectively, a total of $4,686.51. The consolidation loan has a monthly payment of $164.65 and total interest paid of $4,758.62. The increase in costs is due, in part, to the rounding up of the interest rate.

Why Consolidate?

There are several advantages to a Federal Consolidation Loan:

• Consolidation streamlines repayment, replacing multiple loans with a single loan
• Borrowers of a Federal Consolidation Loan can choose a longer repayment term, leading to a lower monthly payment
• Borrowers can use consolidation to change the servicer on their federal student loans
• No credit check or cosigner is required for a Federal Consolidation Loan
• Consolidation resets the clock on deferments and forbearances
• If one or more of the loans were subject to the $50 minimum monthly payment, consolidation eliminates the multiple minimum payments

There also are several disadvantages to a Federal Consolidation Loan:

• A longer repayment term leads to more payments and more interest
• If a Federal Perkins loan is included in the consolidation loan, the borrower will lose the subsidized interest benefits and certain loan cancellation options. This is in contrast with the subsidized interest benefits on a subsidized Federal Stafford loan, which are preserved when the loan is consolidated.
• Borrowers who consolidate during the grace period will lose the remainder of the grace period. Servicers of Federal Direct Consolidation Loans, however, might be willing to delay the effective date of the consolidation until the end of the grace period.
• Unpaid interest will be capitalized when the loan is consolidated, charging interest on interest.
• After the borrower’s loans are consolidated, the borrower can no longer accelerate repayment of the highest-rate loans. But you can keep the highest-rate loans out of the consolidation for quicker repayment.
• Consolidation can increase the interest rate up to an eighth of a percent (0.125%).
• Consolidation does not save money, since the interest rate does not decrease.
• Including a Federal Parent PLUS loan with the consolidation loan eliminates the loan eligibility for income-driven repayment plans. If the loans entered repayment on or after July 1, 2006, the consolidation loan will be eligible for the income-contingent repayment plan (ICR) but not the other income-driven repayment plans. The Federal Grad PLUS loan is not subject to this limitation.
• Once you consolidate your loans, you cannot undo the consolidation loan.

There also were a few considerations relating to the old federally guaranteed student loans in the Federal Family Education Loan Program (FFELP). One could consolidate FFELP loans into the Direct Loan program to qualify for Public Service Loan Forgiveness. Consolidation could ensure that the borrower had a single servicer if the loans were split among multiple servicers.

Borrowers who consolidated FFELP loans would lose the loan discounts. Consolidation could be used to lock in variable-rate federal loans at a fixed rate. All Federal Education Loans have had fixed interest rates since July 1, 2006.

Which Loans Can Be Consolidated?

Only Federal Education Loans can be included in a Federal Consolidation Loan. Private student loans and private parent loans are not eligible.

Eligible Federal Education Loans include: subsidized and unsubsidized Federal Stafford Loans, Federal Perkins Loans, Federal Grad PLUS Loans, Federal Parent PLUS Loans, Supplemental Loans for Students (SLS), Nursing Student Loans, Nurse Faculty Loans, Health Education Assistance Loans (HEAL), Health Professions Student Loans and Loans for Disadvantaged Students.

Even though Federal Stafford Loans and Federal PLUS Loans can be consolidated together, a student’s Federal Stafford Loans cannot be consolidated with their parent’s Federal Parent PLUS Loans.

Married borrowers cannot consolidate their loans together for similar reasons. Congress previously allowed joint consolidations, but repealed it effective July 1, 2006 because of the problems that arose when married borrowers divorced and the joint consolidation could not be undone.

To consolidate defaulted federal loans, the borrower must either rehabilitate the defaulted loans by making three consecutive, full and on-time monthly payments or agree to repay the consolidation loan under an income-driven repayment plan.

When Can You Consolidate?

Borrowers may consolidate their federal student loans after they graduate or drop below half-time enrollment. Thus, borrowers can consolidate only during the grace and repayment periods, but not during the in-school period.

How to Get a Consolidation Loan

Apply for a Federal Direct Consolidation Loan through StudentLoans.gov. Do not pay a fee to consolidate your federal student loans, change repayment plans, postpone payments or qualify for loan forgiveness. You can do this on your own for free.

Repayment of Federal Consolidation Loans

Repayment of a Federal Consolidation Loan begins within 60 days after disbursement of the consolidation loan. Consolidation provides borrowers with access to additional repayment plans. For example, there are two types of extended repayment.

Borrowers do not need to consolidate to get an extended 25-year repayment term if they have $30,000 or more in total student loans. So if a borrower consolidates their federal loans, the new consolidation loan is eligible for an extended repayment term based on the loan balance, as shown in this table.

More Information About Consolidation Loans

For more information about Federal Consolidation Loans, call the Loan Consolidation Information Center at 1-800-557-7392.