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Loan Consolidation

OSFA does not participate in the loan consolidation process, but we know that students often have questions. This page provides general information to help you start the process of loan consolidation. For more information, contact your lender.

You can use the National Student Loan Data System (NSLDS), the U.S. Department of Education's central database for student aid, to access information about all your federal student loans. This can be especially helpful as you prepare for loan consolidation.

About Loan Consolidation

Loan consolidation allows you to combine payments from various education loans into one fixed-rate loan with one monthly payment. The fixed rate is computed by using the weighted average of the interest rates for the loans being consolidated, rounded up to the next 1/8th percent. This fixed rate cannot exceed 8.25%.

  • Loan consolidation can ease your finances if you have more than one student loan.
  • Repayment periods can be extended beyond the standard 10-year repayment, and a variety of payment plans is offered.
  • Consolidated loans were created to ease borrower's repayment burden. During times of low interest rates, consolidated loans are also often used as a refinancing tool (to secure a fixed low-interest rate for the lifetime of the loan).
  • It is not recommended to consolidate Federal Perkins or Nursing Loans, due to the low fixed-interest rate already charged.
  • Caution: While lowering your monthly payments, extended repayment plans will increase the amount of interest you are paying on the loan.
  • Loans that can be consolidated
    • Federal Stafford Loans (Subsidized and Unsubsidized)
    • Federal Direct Loans
    • Federal Perkins Loans
    • Nursing Student Loans
    • Federal PLUS Loans
    • National Direct Student Loans
    • Health Professionals Student Loans
    • Health Education Assistance Loan for Students

Consolidation Pros & Cons

Pros Cons
  • Ability to lock in a fixed rate and protect against future rate increases
  • Attractive to those whose income fluctuates
  • Can be effective default-avoidance tool
  • Convenience of making one monthly payment to one lender
  • Flexible repayment plans
  • Long-term payment relief—up to 30 years to repay
  • Monthly payment reduction up to 51% or more
  • Borrower benefits on underlying loans will no longer apply
  • Can increase total interest costs due to extended term
  • Deferment benefits may be reduced
  • Fixed rate prevents borrowers from taking advantage of future rate decreases
  • Some interest subsidy benefits may be lost

Before You Consolidate

As you make the decision to consolidate your loans, consider these points:

Application: The application process typically takes 4-8 weeks. It does not take as long if all of your loans originate from one lender. Keep making payments on your existing loans as your application is processed.

Bankruptcy: Consolidation loans are not typically dischargeable under bankruptcy law.

Compare benefits: Cash back is not always better than a rate reduction. Know the total value of a benefit before deciding.

Deferment: Deferment regulations are generally the same for consolidated loans as they are for Stafford Loans. You may lose interest subsidy during deferments.

Disability and death discharge: Discharge options carry over from your pre-consolidated loans.

Forbearance: Forbearance regulations are generally the same for consolidated loans as they are for Stafford loans.

Minimum balance: The federal government does not specify a minimum amount for loan consolidation, but most lenders do set one.

Review your existing loan situation at: http://www.nslds.ed.gov.

Spousal consolidation: Know the rules before you apply for spousal consolidation. Our general advice is to avoid it.

Eligibility for consolidation

  • Borrower must be out of school or less than half time
  • Loans must be in grace or repayment status
  • Parent borrowers may consolidate at anytime regardless of the child's enrollment status
  • Borrower cannot have an outstanding application for a Federal Consolidation Loan with another lender

Interest Rate Calculation on Federal Consolidation Loans

The interest rate on a Federal Consolidation Loan is the weighted average of the interest rates on the loans being consolidated rounded up to the nearest 1/8 percent.  The interest rate is fixed over the life of the loan.

Steps to calculate:

  1. Multiply each loan by its current interest rate
  2. Add the totals together
  3. Divide the resultant by the total $ of the loans being consolidated
  4. Round up to the nearest 0.125 (1/8 percent)

Example of a weighted-average calculation:

Two loans to consolidate: $17,000 at 6.80% and $6,000 at 5.00%

$17,000 x 6.80% and $6,000 at 5.00%

$115,600 + $30,000 = $145,600

$17,000 + $6,000 = $23,000

$145,6000/$23,000 = 6.330

Rounded up to the nearest 0.125 = 7.125%

Interest rate Considerations

  • Loans disbursed between 7/1/1994 and 7/1/2006 have an in-school/grace interest rate and repayment rate.  The best time for a new graduate to consolidate is during the grace period so that the lower in-school/grace rate is used to calculate the weighted average.  However, consolidating during the grace period will cause the student to forfeit his/her grace period.  There are lenders, however, that are willing to use the lower grace rate and wait until the end of the grace period before executing the loan.
  • The is no grace period on a consolidation loan. Loans go into repayment within 60 days of being disbursed.
  • Federal Consolidation Loans taken out after 11/13/1997 will only honor the interest-subsidy benefits for any subsidized Federal Stafford Loans included in the consolidation.  As a result, Federal Perkins Loans and other subsidized programs lose their interest subsidy benefits once consolidated.
  • Consider the effect that loan consolidation has on the benefits obtained while your students are originally enrolled in school.  If a student chooses to consolidate, the original benefit they were eligible to earn MAY be lost and ultimately, the consolidation loan may offer different borrower benefits.

Maximum Years of Repayment

If the amount being consolidated and other educational debt total:

  • Less than $7,500 = 10 years
  • $7,500 - $9,999 = 12 years
  • $10,000 - $19,999 = 15 years
  • $20,000 - $39,999 = 20 years
  • $40,000 - $59,999 = 25 years
  • Greater than $60,000 = 30 years

Consolidation of Federal and Private (alternative) Loans

There are some options to borrowers who have other federal and private student loans.  However, borrowers should explore the pros and cons of all options.  Generally speaking , Federal Consolidation Loans have a lower, fixed interest rate, while private loans are usually based on a variable rate.  The Private loans may not be included in the consolidation buy payments may include the loan amounts.

Overall, we recommend borrowers explore all their options with regard to student loan repayment, including loan consolidation, and decided on the option that best suits their needs.