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Loan Consolidation Primer

Answers to General Questions

For your convenience, many of the terms in this primer are linked to the Glossary of Frequently Used Terms. Please contact your school's Financial Aid Officer if you have further questions about a term.

What is loan consolidation?
Why do borrowers consolidate their student loans?
What kinds of consolidation programs are available?
How can I consolidate my loans?
When should I consolidate?
Are my loans eligible for reconsolidation?

What is loan consolidation?

Loan consolidation simply means paying off or refinancing multiple loans with one new loan. In essence, you pay off multiple loans (called "underlying loans") with a new loan called a consolidation loan. Please note that loan consolidation is not the same thing as combining all your loans with one lender. Combining loans means asking one lender to buy any loans you have with another lender in an attempt to get all your loans serviced in one place. Lenders are under no obligation to buy or sell loans, so although you might ask for this, you cannot count on it happening. However, even if it did, you still have multiple loans; they have not been consolidated. Consolidation is also not the same thing as what is called the serialization of loans, which simply means you borrow all subsequent loans from your original lender.

Why do borrowers consolidate their student loans?

Borrowers consolidate for one or a combination of reasons, but there are likely at least three:

for convenience
to improve monthly cash flow and possibly save money on overall repayment costs by locking in a fixed interest rate
to renew deferments or gain access to additional deferments during residency

Borrowers consolidate for any combination of these reasons, and there may be more reasons than these listed here. Let's look at each of these in a bit more detail.

For convenience

Borrowers who have multiple loans at multiple loan servicers may find it easier to deal with one loan servicer than several. The key is multiple loan servicers, as borrowers with multiple loans serviced at the same loan servicer may already have the convenience of making one payment against all their loans, whether by check or automatic bank draft. This is sometimes referred to as "combined billing", which simply means the loan servicer sends the borrower one bill for all their loans. For example, suppose a borrower has Subsidized and Unsubsidized Stafford Loans from each year of medical school, plus private loans as well. The borrower may be able to make just one payment against all of these loans if she borrowed from the same loan program or lender and if she has one loan servicer for all of her loans.

To improve monthly cash flow and possibly save money on overall repayment costs

There are two ways borrowers might be able to improve their monthly cash flow through loan consolidation:

Some borrowers may be able to secure a lower fixed rate on their entire loan portfolio through consolidation, thereby reducing both their monthly payment as well as their total repayment amount as compared with the total monthly payments and total repayment amounts on each of their loans taken separately over the course of repayment if they do not consolidate. Remember, many Stafford Loans have variable interest rates, so the potential total repayment amount can go up or down each year depending on variations in the rate which occurs on July 1 of each year for variable rate Stafford Loans.

Some Stafford borrowers in FFEL have to consolidate in order to access repayment terms beyond ten years, thereby reducing their monthly loan payment and improving their monthly cash flow. You must consolidate in order to gain access to repayment terms beyond 10 years with the exception of the following:
- Direct Loan borrowers have access to extended repayment for their Direct Loans (the length of repayment is based on the amount borrowed, the more you borrow, the longer you have to repay) without the borrower having to consolidate.
- HEAL loans may be repaid over a period of 25 years. However, HEAL refinancing terminated on 9/30/2004.
- Private loans can usually be repaid over a period of 20 years.
- FFEL borrowers who accumulate $30,000 or more in Stafford Loans through FFEL beginning on or after October 7, 1998 have access to extended repayment without consolidating (the length of repayment is based on the amount borrowed, the more you borrow, the longer you have to repay).

To renew deferment eligibility or gain access to additional deferments

Some borrowers may be able to either renew their deferment eligibility or gain access to additional deferments through loan consolidation. Please note that this does not apply to all borrowers. This is addressed in detail later in the primer in Specific Questions #3 - "What happens to grace, deferment, and forbearance options when I consolidate?"

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What kinds of consolidation programs are available?

In general, there are two loan consolidation programs available to borrowers:

Federal Consolidation. Federal Consolidation (through the Federal Family Education Loan Program, or FFEL) is available from what some consider the more traditional lenders such as banks and other similar lending institutions and private lenders. Federal Consolidation is available to borrowers with either FFEL Stafford Loans or Staffords through the Direct Loan Program. Should you not already be aware of this, a gentle reminder that lenders offering Federal Consolidation compete against each other, something we will address in more detail in Specific Questions #13 - "What about solicitations I receive about consolidation?"

Direct Loan Consolidation. Direct Loan Consolidation (through the Federal Direct Loan Program, or FDLP) is available "directly" from the federal government; no bank or other lending institution is involved. Direct Loan Consolidation is available to borrowers out of school who meet at least one of the following criteria:

they have at least one Stafford loan through the Direct Loan Program, or
they have no Direct Loans, only Staffords through FFEL, but either their current FFEL holder does not offer Federal Consolidation or they offer Federal Consolidation with an Income Sensitive repayment plan the borrower finds unacceptable.

How can I consolidate my loans?

In general, borrowers who are considering consolidating their student loans may want to contact either their loan servicer(s) or the current holder(s) of their student loans. FFEL borrowers may consolidate with any FFEL lender that offers Federal Consolidation.

While interest in consolidation has declined, there continues to be solicitation activity by marketing organizations to encouraging consolidation among borrowers. Borrowers should be very cautious in dealing with organizations which have sent unsolicited notifications about consolidation, especially if the borrower has no loans with that particular organization.

Direct Loan borrowers may apply for either Direct Loan Consolidation or Federal Consolidation with the FFEL consolidating lender of their choice.

Some lenders allow borrowers to apply for loan consolidation on their Web sites. Borrowers will need to have all their student loan records available as they begin the process; records which may include updated loan balances from their loan servicer's Web site, documents distributed at their medical school exit interview, and routine correspondence received in residency from their loan servicer(s).

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When should I consolidate?

The ideal time to consolidate will likely vary by borrower, but there are a few guidelines that may help you.

Interest rates on variable rate Stafford Loans are lower during grace and deferment by .6% or 60 basis points. (For a refresher on this, see Know the Relative Cost of Your Student Loans.) Therefore, if you consolidate during either grace or deferment, you should get a lower fixed rate on your new consolidation loan than if you waited and consolidated during either forbearance or active repayment when the rates go up by .6%.

Interest rates on variable rate Stafford Loans change each July 1, but are usually announced in early June. For example, some residents who are in deferment and will remain so through June (enjoying the lower rate by 60 basis points), and who have decided to consolidate, may wait until the new rates are announced to determine whether they go ahead and consolidate before July 1 or after July 1. If they discover that rates will go up on July 1, they may go ahead and consolidate prior to July 1 to help ensure a lower fixed rate. However, if rates are staying the same or going down, they may wait until after July 1 to consolidate.
Just remember, when you consolidate, you are hedging your bets that the fixed rate you get will be lower than the average rate you would get on your variable rate loans over the course of repayment, and there are those who would argue that a) there is really no way to predict what rates will do each year and b) borrowers really do not know how long it will take to repay their loans.
Since consolidation is considered a repayment option, any accrued and unpaid interest on any unsubsidized loans you are including in your new consolidation loan will likely capitalize at the time of consolidation.

Some borrowers with long residencies like to use up their deferment options then consolidate if they are in a category that provides the opportunity to renew deferments or gain access to additional deferments. This is covered in detail above.

Are my loans eligible for reconsolidation?

You cannot reconsolidate one Federal Consolidation Loan into a new Federal Consolidation Loan, although it is our understanding that you can reconsolidate one Direct Consolidation Loan into a new Direct Consolidation Loan. However, doing so might not help you anyway, as consolidation loans carry a fixed rate and borrowers therefore cannot take advantage of interest rate decreases if they consolidated already.

You may want to note one fairly common mistake among borrowers about reconsolidation. There are some borrowers who say "I will go ahead and consolidate, but will keep out a few eligible loans from the consolidation loan so I can consolidate later and take advantage of any future interest rate reductions". This is a common mistake, because as noted earlier and as noted in detail above, consolidation loans have fixed interest rates and are therefore not impacted by swings in the interest rates. For example, suppose a borrower consolidates $80,000 in Stafford Loans and receives a fixed rate of 7.5%, but he leaves out two Federal Stafford Loans (each with variable interest rates) that total $10,000. While it is true that the borrower could consolidate the consolidation loan with the two Federal Stafford Loans at a later date (presumably when rates went down), the only loans affected by the rate drop are the two Stafford Loans which total just $10,000. In other words, the "weight" given to the $80,000 at 7.5% far outweighs the "weight" given $10,000 at a lower rate.

Read Answers to Specific Questions >>

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