The Scoop on Student Loan Consolidation
Why would I consolidate?
Heads up government and nonprofit workers: consolidation can get your federal loans into Federal Direct so that you can participate in Public Service Loan Forgiveness.
· Only Federal Direct loans are eligible for Public Service Loan Forgiveness. That’s one very good reason to consolidate.
· Consolidation allows you to group your loans together with one lender.
· Consolidation can give you access to a longer repayment period and lower monthly payments.
Bear in mind that the longer it takes you to pay off your debt, the more interest you will pay over time, and extended repayment isn’t necessarily the best repayment plan. I encourage borrowers with relatively high student debt-to-income ratios to consider the advantages of the Income-Based Repayment plan (like the interest subsidy and forgiveness provisions).
Which loans can I consolidate?
Under the Direct Loan Consolidation Program, you can consolidate just about every type of federal student loan (including Subsidized and Unsubsidized Stafford Loans, PLUS Loans, and Perkins Loans). Be careful deciding whether to consolidate Perkins loans, because they have their own cancellation provisions that would be lost upon consolidation. You may NOT consolidate a joint consolidation loan.
If you’ve already consolidated, you have the right to “re-consolidate” into Federal Direct in order to participate in the Public Service Loan Forgiveness program. Phew. Otherwise, borrowers can only reconsolidate under certain limited circumstances.
BEWARE of consolidating federal loans into a private consolidation loan. I am not a big fan of private student loans. If you consolidate federal loans into a private loan, you would lose cool rights and protections like deferment, forbearance, cancellation, Income-Based Repayment, and Public Service Loan Forgiveness. Already have some pesky private loans? Me too. Sadly, you cannot consolidate private student loans into a federal consolidation loan.
What happens to my interest rate if I consolidate?
Interest rates for federal student loans borrowed on or after July 1, 2006 are fixed. Federal consolidation loans also have fixed interest rates. The consolidation loan interest rate is based on the weighted average interest rates of the loans you consolidate, rounded up to the nearest 1/8th of one percent, and capped at 8.25%. Unless you have old federal student loans (from before July 1, 2006), consolidating essentially preserves your current interest rates.
If you borrowed before July 1, 2006, you may have variable rate federal loans. You can lock in a fixed interest rate by consolidating, and you may get an interest rate reduction. Rates are currently low. Check out the current rates for 2011-12.
Some borrowers (not most) may have earned modest interest rate reductions called “borrower incentives,” typically granted after a certain number of on-time or automatic payments. If you earned such a perk, you’d lose it by consolidating, since those benefits are specific to the lender. Ask your lender to figure out the deal with that.
When can I consolidate?
You can consolidate during grace periods, but be aware that once you have done so, your consolidation loan will enter repayment. You can also consolidate while you are in repayment, deferment, or forbearance. If your loans are in default, you may consolidate in certain circumstances. You may not consolidate while you are still in school.
How do I consolidate?
First get your, um, stuff together.
You’ll need information from your loan records to complete the consolidation application.
If you don’t have meticulous records (scandal!), start by getting your PIN from the U.S. Department of Education Federal Student Aid Web site, then log on to the National Student Loan Data System to retrieve your loan info.
Figure out which repayment plan you want to select for your consolidation loan using available calculators.
Visit the Direct Loan Consolidation website and fill out the online or paper consolidation application and all the forms that go with it.
