Loan Consolidation Primer

Answers to Specific Questions

For your convenience, many of the financial aid terms in this primer have been linked to the glossary of frequently used terms. Please contact your school's financial aid officer if you have further questions about a term.

1. Which loans can be consolidated?
2. How is the interest rate on my new consolidation loan determined?
3. What happens to grace, deferment, and forbearance options when I consolidate?
4. What happens to the interest subsidy when I consolidate if I qualify for deferment on my new consolidation loan?
5. What about borrower benefits or repayment incentives?
6. What repayment options are available to borrowers on their new consolidation loan?
7. What are the monthly payment and total repayment amounts if I consolidate?
8. Can I pay off my consolidation loan early, and how are payments applied?
9. Who will service my new consolidation loan?
10. Are there any hidden fees or hidden costs with consolidation?
11. How long will this take, and what happens to my loans during consolidation?
12. What about spousal or joint consolidation?
13. What about unsolicited information I receive about consolidation?
14. How can I get an estimate of my monthly payments so I can decide if consolidating is the best thing for me right now?
15. Can I deduct the student loan interest on my consolidation loan on my federal income tax return?
16. Will consolidating my loans have a negative impact on my ability to qualify for an Economic Hardship Deferment?
17. What would the consequences be if I run into real financial problems, had to file for bankruptcy?
18. Can I include my HEAL loans in my consolidation loan?

1. Which loans can be consolidated?
The following loans can be consolidated into either Federal Consolidation or Direct Loan Consolidation:

• Guaranteed Student Loan (GSL)
• Federal Supplemental Loan for Students (Federal SLS)
• Federal Subsidized Stafford (either FFEL or Direct)
• Federal Unsubsidized Stafford (either FFEL or Direct)
• Federal Parent Loan for Undergraduate Students (Federal PLUS)
• Federal Perkins (formerly National Direct Student Loan)
• Graduate PLUS Loan (either FFEL or Direct)
• Health Professions Student Loan (HPSL)
• Loans for Disadvantaged Students (LDS)
• Nursing Student Loan (NSL)
• Health Education Assistance Loan (HEAL)
• Consolidation Loans (either Federal or Direct)

Both institutional loans and private loans cannot be consolidated through either Federal or Direct Loan Consolidation.

However, borrowers with private loans serviced by the same loan servicer as their Stafford Loans may be able to make one loan payment when entering active repayment through "combined billing."

2. How is the interest rate on my new consolidation loan determined?

The interest rate for both Federal Consolidation and Direct Loan Consolidation is determined as the weighted average of all underlying loans being consolidated rounded to the nearest higher one eighth of one percent and fixed for the remainder of the life of the loan. At the time the fixed rate is determined, it may never be higher than 8.25%. Please note that older consolidation loans may have different rates, but this is the interest rate structure currently in effect for new consolidation loans.

Some consolidating lenders may offer discounted interest rates, but if so, they will likely have provisions or conditions attached to any interest rate reduction. Note this caution: Medical school borrowers have a wonderful record of timely repayment of their student loans. However, some of the interest rate discounts consolidating lenders may offer are tied to on-time payments. Be sure you know what the provisions or conditions are for receiving these benefits, and also be sure you know what kind of grace period the consolidating lender allows for late payments, as it may be lower than the industry standard of 14 or 15 days.

Interest rates in HEAL Refinancing depend on the consolidating lender, although they are all variable and tied or indexed to the 91-Day Treasury Bill (91-Day T-Bill). They also have no interest rate cap.

• First, in Federal Consolidation, the current interest rate on the borrower's HEAL loan(s) is not used in the weighted average determination of the interest rate for the new Federal Consolidation Loan. In addition, the HEAL loan(s) being consolidated are assigned a new variable interest rate of the 91-Day T-Bill plus 3.0% with no cap for the remainder of repayment, regardless of the current interest rate for the HEAL(s) being consolidated. In other words, even though the HEAL loans become part of the new Federal Consolidation Loan, they effectively maintain a separate, and likely higher, interest rate. For example, suppose a HEAL borrower has an interest rate of the 91-Day T-Bill plus 2.0% on her HEAL loans, but she decides to consolidate them with her Stafford through Federal Consolidation. The current HEAL rate is not used in determining the rate assigned to Federal Consolidation, and the HEAL loans she consolidated will be assigned a new rate of the 91-Day T-Bill plus 3.0%.
  
• Second, in Direct Loan Consolidation, the current interest rate on the borrower's HEAL loan(s) is used in the weighted average determination on the interest rate for the new Direct Consolidation Loan. Therefore, the HEAL loan(s) being consolidated are effectively assigned the same fixed, capped rate as the entire new consolidation loan. In other words, the HEAL loans become part of the new Direct Consolidation Loan and the entire new consolidation loan has the same fixed rate.

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3. What happens to grace, deferment, and forbearance options when I consolidate?
This is perhaps one of the most complicated questions related to loan consolidation, yet by many accounts, one of the most important. You may want to refer to the Loan Repayment Timetable for additional assistance in understanding Question #3.

In general, when loans are consolidated, the loans go away, and all the terms, conditions, benefits, and any other provisions assigned to those loans go away. The loans no longer exist, so in theory, there is nothing to which terms, conditions, benefits, or other provisions can be attached. However, it is more complicated than that, and there are some exceptions to that general theory. Here are some important points to consider as we answer this question.

• First, you lose grace, deferment, and forbearance provisions on HEAL loans if they are consolidated in either Federal Consolidation or Direct Loan Consolidation. Once again, the theory is that the HEAL loans are gone, and so are the provisions attached to them. This is important to remember for HEAL borrowers who plan to practice primary care, because they will lose the additional three years of deferment for primary care practice on their HEAL loans if they consolidate them into either Federal Consolidation or Direct Loan Consolidation.
  


• Second, you lose any remaining months of grace if you consolidate during grace in either Federal Consolidation or Direct Loan Consolidation, so if you want to consolidate during grace, you might do so toward the end of your grace period.



• Third, old Stafford borrowers who consolidate all outstanding GSL Program loans at the same time may apply for the Economic Hardship Deferment for up to three years on their new consolidation loan. This provision of being able to move from old Stafford borrower status to new Stafford borrower status through consolidation applies to both the Federal Consolidation and Direct Loan Consolidation programs. However, borrowers applying for Federal Consolidation must consolidate all their Stafford Loans at the same time in order to move from old to new status, while borrowers applying for Direct Loan Consolidation must simply include one or more Stafford Loans from before July 1, 1993 with a Stafford Loan made on or after that date in order to move from old to new status. Old borrowers who are eligible for and are considering consolidating with Direct Loan Consolidation should confirm this with the Direct Loan Consolidation program when they apply.
  
  

  For example, an 'old' Stafford borrower doing a lengthy residency, uses her 6 month grace period following graduation, then two years of Internship Residency Deferment following grace. If she consolidates all her outstanding GSL Program loans (Stafford loans) at that time, she may apply for the Economic Hardship Deferment, one year at a time, for up to three years, on her new consolidation loan. In this example, assuming the borrower qualified for the hardship deferment each year, she would receive a total of five years of deferment in addition to her 6 month grace period. Once again, this provision applies to both Federal Consolidation and Direct Loan Consolidation.



• Fourth, 'old' Stafford borrowers who are eligible for and consolidate through Direct Loan Consolidation may renew or 'refresh' their two year Internship Residency Deferment. However, please note that this provision of renewing the two year Internship Residency Deferment applies only to Direct Loan Consolidation, not Federal Consolidation.

  For example, an 'old' Stafford borrower is doing a four year residency program, uses his 6 month grace period following graduation, then two years of Internship Residency Deferment following grace. If he is eligible for and consolidates through Direct Loan Consolidation, he can renew his two year Internship Residency Deferment (although in this example, he will only need one and one half years for the remainder of residency).

  As another example, an 'old' Stafford borrower is doing a seven year residency program, and uses his 6 month grace period following graduation, then two years of Internship Residency Deferment following grace. If he then consolidates through Direct Loan Consolidation, he can renew his two year Internship Residency Deferment and he may apply for Economic Hardship Deferment. In this example, assuming the borrower qualified for hardship deferment, he would be eligible for seven years of deferment in addition to his 6 month grace period.



• Fifth, 'new' Stafford borrowers who consolidate in Direct Loan Consolidation only may apply for up to three additional years of Economic Hardship Deferment on their new consolidation loan, regardless of how many years of hardship deferment they have qualified for prior to consolidating.

  For example, a new Stafford borrower is doing a lengthy residency, and uses her 6 month grace period following graduation, then applies for and receives three years of hardship deferment (one year at a time), following grace. If the borrower consolidates through Direct Loan Consolidation, she may apply for the Economic Hardship Deferment again, one year at a time, for up to three years.



• Sixth, new borrowers who consolidate through Federal Consolidation do not lose any remaining periods of eligibility for the Economic Hardship Deferment. For example, suppose a new borrower has used up 8 months of eligibility in the hardship deferment, then he consolidates through Federal Consolidation. He is eligible for up to 4 months plus 2 years of hardship deferment, assuming he qualifies.



• Seventh, borrowers may still apply for the Graduate Fellowship Deferment if they consolidate through either Federal Consolidation or Direct Loan Consolidation (you do not lose this deferment as long as you and your program meet the requirements for this deferment).



• Finally, borrowers may still apply for mandatory forbearance for medical residents if they consolidate through either Federal Consolidation or Direct Loan Consolidation (you do not lose this forbearance option, as long as you remain in residency).

4. What happens to the interest subsidy when I consolidate if I qualify for deferment on my new consolidation loan?

Borrowers who consolidate through either Federal Consolidation or Direct Loan Consolidation will maintain the interest subsidy on that portion of their new consolidation loan that is made up of Subsidized Stafford Loans as long as the borrower qualifies for deferment on their consolidation loan.

The interest rate on Federal Perkins Loans is treated differently in Federal and Direct Loan Consolidation: In Federal Consolidation, Federal Perkins Loans are no longer interest free even if the borrower is in deferment on their Federal Consolidation Loan. In Direct Loan Consolidation, Federal Perkins Loans do remain interest free as long as the borrower is in deferment on their Direct Consolidation Loan.

Please note that both Health Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS) lose their interest free status when they are consolidated into either Federal or Direct Loan Consolidation, even if the new consolidation loan is in deferment.

5. What about 'borrower benefits' or 'repayment incentives'?
In general, when borrowers consolidate in either Federal Consolidation or Direct Loan Consolidation, borrower benefits or repayment incentives associated with any of the underlying Stafford Loans being consolidated are lost. The previous loans are gone, so any repayment benefits attached to the loans are also gone. This should be confirmed with the consolidating lender when borrowers are making applications for their new consolidation loans, but borrowers can expect to lose these benefits when they consolidate. Please note that as referenced before in Question #2-"How is the interest rate determined on my new consolidation loan?", some consolidating lenders offer borrower benefits or repayment incentives on their consolidation loans. Just be sure you understand what provisions or conditions are attached to these benefits.

6. What repayment options are available to borrowers on their new consolidation loan?
Standard (Level), Graduated, Income Sensitive (in Federal Consolidation), Income Contingent (in Direct Loan Consolidation), and Extended Repayment options should be available to borrowers who consolidate in either Federal or Direct Loan Consolidation (with the differences noted above). Borrowers may be able to switch repayment plans should their financial circumstances change (contact your loan servicer in this regard, as some restrictions may apply).

Just a few reminders about repayment options with consolidation loans:

• First, as referenced earlier, FFEL Stafford borrowers who began borrowing prior to October 7, 1998 may have to consolidate in order to have access to extended repayment terms beyond ten years.
  
• Second, please also remember that just because you consolidate your loans does not mean you have to take more than 10 years to repay. For many years, consolidation has been associated with extended repayment terms. However, such does not have to be the case, especially with some borrowers consolidating in order to take advantage of low fixed rates over a 10 year repayment.


• Third, the normal repayment length for Standard (Level) repayment with HEAL loans (including HEAL Refinance loans) is 25 years, but again, borrowers may choose a shorter repayment term if they like.

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7. What are both the monthly payment and total repayment amounts if I decide to consolidate?
This is a question to ask your consolidating lender, as the answer will vary depending on not only the type and amount of the underlying loans you are consolidating, but the applicable interest rate at the time of consolidation.

In general, borrowers who amortize or spread out repayment over an extended period of time will see a drop in their monthly payments. However, they will also see an increase in their total finance costs over the repayment length, because the longer you take to repay a loan, the more it will cost you.

8. Can I pay off my consolidation loan early, and how are payments applied?
There is never an interest penalty for early repayment of federal student loans, including consolidation loans. However, payments on all federal student loans will be applied first to any late charges, next to outstanding accrued and unpaid interest, then against principal. This includes payments in both Federal Consolidation and Direct Loan Consolidation.

9. Who will service my new consolidation loan?
This is a question to ask your consolidating lender. In Federal Consolidation, the consolidating lender may service their own loans or they may contract with another organization to provide servicing for their consolidation loans.

The Direct Loan Servicer provides servicing for Direct Loans, including Direct Consolidation Loans. In truth, they contract with other organizations to provide this servicing, but you should still always hear the reference to the Direct Loan Servicer as the servicer of Direct Loans and Direct Consolidation Loans.

Loan servicing is considered by many to be an integral part of educational debt management and loan repayment. Therefore, you may be well served to get acquainted with the servicer of your new consolidation loan. You may want to be cautious about solicitations from organizations you have never heard of or who do not own your student loans, especially as regards their loan servicer.

Your medical school financial aid officer may be able to help you in this regard. Remember, most likely they have years of experience working with various loan servicers and probably know those with the best reputations for helping not only borrowers in general, but medical residents in particular.

10. Are there any hidden fees or hidden costs with consolidation?
There should not be any application fees, or fees of any other kind, when you consolidate your loans through either Federal Consolidation or Direct Loan Consolidation. Some organizations may reference having no fees on their consolidation loans in their solicitation materials as a marketing strategy to make their program look less expensive than other competitor programs.

Please note that in many (perhaps most) cases, any accrued and unpaid interest on unsubsidized loans that are being included in the new consolidation loan will be capitalized at the time of consolidation, and some may consider this a hidden fee simply because borrowers often forget this happens.

11. How long will this take, and what happens now to my loans during consolidation?
This will likely depend on a number of things, including how many different holders your consolidating lender must contact for payoff balance information on the underlying loans you are consolidating. You should ask your consolidating lender this question, but you can usually expect the entire process to take between 45 and 60 days. This time should be greatly reduced if you are consolidating with the lender who already owns your loans.

Borrowers are well advised to keep the loans they are consolidating in their current status during the consolidation process (grace, deferment, forbearance, or active repayment) until the consolidation loan goes through. This is also something you should ask your consolidating lender.

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12. What about spousal or joint consolidation?
Spousal consolidation is not permitted.

13. What about unsolicited information I receive about consolidation? As previously noted, lenders offering Federal Consolidation and Direct Loan Consolidation compete with each other, and Federal Consolidation competes with Direct Loan Consolidation (and vice versa) for borrowers who are interested in consolidating their student loans. Competition should be good for borrowers, and in many cases, that is the case. However, there are some who would argue that there is really no problem with borrowers receiving unsolicited information on loan consolidation, even from organizations they have never heard of or who do not own their loans. However, competition can sometimes lead to not only misinformation, but incomplete information as well, and that can be almost as dangerous for borrowers.

Therefore, we offer a few reminders or suggestions that may help you when you get solicitations regarding consolidation, once again, especially from organizations you have never heard of or who do not own your loans:

• First, you may want to ask how the particular organization(s) that contacted you got your information.

• Second, you may want to let your medical school financial aid officer know you were contacted about consolidation, and by whom, as they may have information about what level of service the lender provides based on their experience with them.

• Third, when reviewing unsolicited information on loan consolidation from organizations that contact you, take note that much of it may be undergraduate driven, meaning it does not address the particulars of residency and fellowship that can be so crucial to medical school borrowers. For example, it is not unusual for such information to remind borrowers that if they are going to consolidate, they should do so during their grace period when the rates are still low (which has been discussed previously). However, even though that is true, they fail to mention that rates are also low during periods of deferment (for which many residents qualify.)

14. Is there a way I can get an estimate of how much my monthly payments will be so I can decide if consolidating is the best thing for me right now? Servicers have calculators on their web sites that you can use to "run" the numbers so that you will have a good estimate of what the cost will be and can make a more informed decision. If you have specific questions, and want to talk to a real person, call your servicer.

15. Can I deduct the student loan interest on my consolidation loan on my federal income tax return? The student loan interest deduction is generally the smaller of $2,500 OR the interest you paid in the prior tax year. You must meet certain federal filing status criteria and income thresholds in order to deduct your interest in full.

Details and examples of how to calculate your interest paid are found in the Internal Revenue Service's instructions for the 1040 tax return (PDF, 87 pages), specifically for line 33.

16. Will consolidating my loans have a negative impact on my ability to qualify for an Economic Hardship Deferment? The simple answer is "No". However, the more complex answer is that it will depend on how much loan debt you have and the ratio of your monthly income to your loan debt burden. Your consolidation loan will be included in your loan debt burden so it should help. But again, it will depend on the total of your loan debt burden.

17. If I run into real financial problems, and can't pay off my consolidation loan, I can always file for bankruptcy. What would the consequences be if I had to take that drastic step? The consequences would be dire. If you find yourself in difficult financial circumstances, contact your servicer and ask them for help. Remember to identify yourself as a medical resident so that you receive customized assistance for medical students. It is NEVER a good idea to allow your loan to go into default. Furthermore, it is virtually impossible to have your student loan included in your bankruptcy proceeding. You will ruin you credit for almost your entire life. This action will haunt you as you attempt to purchase a car, buy a house, and may even prevent you from joining a medical practice. Default and bankruptcy are not viable options for repaying your student loans.

18. Can I include my HEAL loans in my consolidation loan? Yes, you can. The interest rate on the HEAL portion of a consolidation loan is a variable rate that is adjusted annually on July 1. This rate is set at 3% over the bond-equivalent rate for the three month Treasury Bills auctioned during the three months ending June 30. There is no cap on the HEAL interest rate.

Read Answers to General Questions >>

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