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.
What is loan consolidation?
Loan consolidation simply means paying off or refinancing existing loans with a single new loan. In essence, you pay off one or more loans (called "underlying loans") with a new loan called a consolidation loan.
Why do borrowers consolidate their student loans?
Borrowers consolidate for various reasons; however, the three most common reasons are:
- for convenience
- to fix variable interest rate loans
- to make currently ineligible loans eligible for certain loan repayment or forgiveness programs
Depending on your circumstances, there may be even more reasons to consolidate. Let's look at the reasons above in a bit more detail.
Borrowers who have multiple loans at multiple loan servicers may find it easier to manage their loans with one loan servicer rather than with several servicers. For instance, if a borrower has Subsidized and Unsubsidized Stafford Loans from their undergraduate program with servicer A, and has Subsidized and Unsubsidized Stafford Loans from medical school with Servicer B, the borrower would have two different servicers. This means she would have two different payments each month. A borrower may consider consolidating all her loans with one servicer to make payment more convenient (i.e. make one monthly payment on one loan).
To fix variable rate loans
Borrowers with variable interest rate loans can consolidate to obtain a fixed interest rate. Stafford Loans disbursed between 7/1/98 and 6/30/06 have variable interest rates, so the potential total repayment amount can go up or down each year depending on variations in the interest rate. Interest rates adjust annually on July 1 for variable rate Stafford Loans. To view the federal loans within your loan portfolio, go to www.NSLDS.ed.gov . To consolidate your loans, contact the Direct Loan program at www.loanconsolidation.ed.gov .
Note: Private loans cannot be included in any Direct Consolidation Loan. Borrowers who have private loans should contact their lender to discuss repayment possibilities and alternatives.
To make ineligible loans eligible for loan repayment or forgiveness programs
Some loans that were not originally disbursed from Direct Loans are not eligible, in their current state, for certain loan forgiveness programs or loan repayment plans, such as Public Service Loan Forgiveness (PSLF), Pay As You Earn Repayment or Income-Based Repayment. However, if a borrower consolidates their ineligible loans into a Direct Consolidation Loan, then the loans may become eligible for these programs/plans.
Am I eligible for a consolidation loan?
The Direct Consolidation Loan is available "directly" from the federal government; no bank or other lending institution is involved. A Direct Consolidation Loan is available to borrowers who are no longer enrolled in school full-time and meet at least one of the following criteria:
- have at least one Stafford loan through the Direct Loan Program
- have Stafford Loans through the FFELP, but wish to consolidate in order to participate in Public Service Loan Forgiveness
Note: Defaulted loans may be eligible for consolidation, if the borrower agrees to certain terms and conditions. Contact the Direct Consolidation Loan Center at 1-800-557-7392 for more information.
How can I consolidate my loans?
Borrowers who are considering consolidation and need additional information are urged to contact Direct Loans at www.loanconsolidation.ed.gov . Borrowers who are ready to apply for loan consolidation will need to have all their student loan records available; this will help with the application process. A borrower’s federal loans can be gathered from www.NSLDS.ed.gov . In addition to information from NSLDS, records that may have been distributed at the medical school exit interview and during routine correspondence from loan servicer while in residency, may be used for the application process.
When should I consolidate?
If a borrower chooses to consolidate, the reason for consolidating may dictate the ideal time to complete the consolidation application. You are eligible to consolidate your loans when they are in a grace, repayment, deferment or default status, but not while they are in an in-school status.
The timing of consolidation usually occurs for one of two purposes:
Immediate processing: Some graduates want to consolidate and begin repayment as soon as possible. Most consolidation applications will be processed within 30-days and the new consolidation loan will be disbursed at the end of that time. The first payment for this new loan is then typically due within 30-days from the date of disbursement.
After grace: Many times, new graduates prefer to take advantage of their grace period and use the 6-month grace period (when payments are not required) as a time to set up a budgeting plan. Therefore, some graduates will choose to submit their consolidation application approximately 30-days prior to the end of their grace period or they may request a “grace hold” on the application so that Direct Loans will hold the application and only begin to process it towards the end of the grace period. With either method, the borrower is able to have a period of time when no payments are required.
Are my loans eligible for reconsolidation?
Existing consolidation loans can often be included in a new consolidation loan (allowing for reconsolidation). The only time this may not be allowed is when both of the following conditions exist:
1) the consolidation is a Direct Consolidation Loan and,
2) there are no outstanding loans to be included in a new consolidation loan.
For more information about consolidation, review “Should I Consolidate?” and “The Effects of Loan Consolidation” found in the Other Considerations Chapter of the Education Debt Manager .
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