Answers to Specific Questions
Which loans can be consolidated?
The following loans can be consolidated into either Federal Consolidation or Direct Loan Consolidation:
- Federal Subsidized Stafford (either FFEL or Direct)
- Federal Unsubsidized Stafford (either FFEL or Direct)
- Federal Parent Loan for Undergraduate Students (Federal PLUS)
- Federal Perkins
- Graduate PLUS Loan (either FFEL or Direct)
- Health Professions Student Loan (HPSL)
- Loans for Disadvantaged Students (LDS)
- Nursing Student Loan (NSL)
- Consolidation Loans (either Federal or Direct)
Both institutional loans and private loans cannot be consolidated through Direct Loan Consolidation.
How is the interest rate on my new consolidation loan determined?
The interest rate for a “regular” Direct Loan Consolidation loan is determined as the weighted average of all underlying loans being consolidated and rounded up to the next higher one-eighth of one percent, and then fixed for the remainder of the life of the loan.
What happens to grace, deferment, and forbearance options when I consolidate?
This is a very important question related to loan consolidation. You may want to refer to the Loan Repayment Timeline 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.
- First, you lose any remaining months of grace if you consolidate during grace in Direct Loan Consolidation, so if you want to consolidate during grace, consider applying toward the end of your grace period, about 30 days before it ends.
- Second, borrowers may still apply for the Graduate Fellowship Deferment when they consolidate through 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 Direct Loan Consolidation (you do not lose this forbearance option, as long as you remain in residency).
There is no grace period on an In-School Consolidation Loan. If a borrower consolidates a loan that has a grace period while the borrower is still in school on at least a half-time basis and before the loan has entered the grace period, the borrower will not receive a grace period on that loan after the borrower ceases to be enrolled on at least a half-time basis. The borrower will, however, be eligible for an in-school deferment on the In-School Consolidation Loan while enrolled at least half-time at an eligible institution.
What happens to the interest subsidy when I consolidate if I qualify for deferment on my new consolidation loan?
Federal Perkins Loans consolidated into a Direct Consolidation Loan will be included in the unsubsidized portion of the Direct Consolidation Loan so will lose their interest free status.
Note: Carefully consider the pros and cons of including a Perkins Loan in a Direct Consolidation Loan as important benefits associated with the Perkins Loan program will be lost.
Both Health Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS) lose their interest free status when they are consolidated into Direct Loan Consolidation.
What about 'borrower benefits' or 'repayment incentives'?
In general, when borrowers consolidate in 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 Direct Loans when borrowers are making applications for their new consolidation loans.
What repayment options are available to borrowers on their new consolidation loan?
Standard (Level), Graduated, Income Contingent, Income-Based, and Extended Repayment options should be available to borrowers who consolidate in Direct Loan Consolidation. 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:
Please 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.
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 the type and amount of the underlying loans you are consolidating as well as 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.
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 Direct Loan Consolidation.
Who will service my new consolidation loan?
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. In fact, the servicer is the entity with whom you are likely to have a long term relationship, so it is prudent to keep your servicer up-to-date with all of your current contact information.
Are there any hidden fees or hidden costs with consolidation?
There should not be fees of any kind when you consolidate your loans.
Please note that in many 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.
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 this question to your consolidating lender, Direct Loans, but you can usually expect the entire process to take between 60 and 90 days.
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.
What about spousal or joint consolidation?
Spousal consolidation is not permitted.
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, contact the Direct Loan Consolidation Loan program.
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.
|Full Deduction||Partial Deduction||No Deduction|
|Single||$60,000 or less||$60,001 to $74,999||$75,000 or more|
|Married filing jointly||$120,000 or less||$120,001 to $149,999||$150,000 or more|
Details and examples of how to calculate your interest paid are found in the Internal Revenue Service's instructions for the 1040 tax return , specifically for line 33.
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 your credit for almost your entire life. This action will haunt you as you attempt to purchase a car or buy a house. Default and bankruptcy are not viable options for repaying your student loans.
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