Student Loan Consolidation

As soon as a student graduates, or drops below half-time enrollment status, they are eligible to consolidate any Direct or FFEL Loans that are outstanding. Those taken out by parents of students, PLUS Loans, are eligible for consolidation once they have been completely disbursed.

Borrowers that have been delinquent in paying back their federal student loans may not be immediately eligible for consolidation. If that is the case, the holder of the loan can explain what corrective actions can be taken to become eligible once again.

In order to get a Direct consolidation loan, the borrower needs to include at least one FFEL or Direct Loan. If there is only a FFEL loan outstanding, the borrower must first contact a lender that provides FFEL consolidation services. If the borrower is not eligible under their program, or it's not possible to get a loan that has acceptable income-sensitive repayment terms, the borrower should then determine if they are eligible for an income sensitive repayment plan under the Direct consolidation loan program.

The following student loan types cannot be combined into a Direct consolidation loan:

• Primary Care Loans

• Law Access Loans

• Medical Assist Loans

• PLATO Loans

• Loans made by a state lender that are not guaranteed by the federal government

• Loans made by a private lender that are not guaranteed by the federal government

Most of the time, former students will consolidate their student loans for one of two reasons: to lower their monthly payments, or to save money over the term of the loan. By extending the time over which the loan is repaid, the borrower can lower their monthly payments.

Loan Example 1

Haley is a former student with loans of $10,000, carrying a 7.0% interest rate, and a term of ten years. Her monthly payments are $116.11. By consolidating her loan, she is able to extend the repayment period. That same loan with a 20 year term would result in payments of $77.53 per month, which is a savings of nearly $50.

It's also possible to save money by taking advantage of lower interest rates. If rates have gone down since the loan was written, lenders can offer a lower rate of interest on the consolidated loan.

Borrowers can also save money by prepaying their loan. By prepaying an additional portion of the principal each month, it's possible to shorten the life of the loan and lower the cost of borrowing money.

While extending the term of the loan can save on monthly payments, this is a costly option. By extending the term over which the money is borrowed, the overall cost of the loan will be significantly higher.

Loan Example 2

Let's go back to our prior example, where we lowered Haley's monthly payment by nearly $50 per month. To save that $50, the term of that loan was extended from 10 to 20 years. With the original loan, the monthly payment was $116.11 and the total of all payments would have been $13,933.02.

By extending the loan another 10 years, Haley was able to lower her monthly payment to $77.53. However, the total money paid back is now $18,607.17. That's a difference of $4,674.15.

Anyone that would like to run through similar scenarios can use the Simple Monthly Loan Calculator found on this website to see the impacts of switching to a consolidated loan.

Admittedly, the eligibility rules, student loan types, and interest rate calculations are difficult for many people to understand. Fortunately, the student loan consolidation center can walk former students through the decision and application process. Run by the Department of Education, the website has additional information on repayment periods, terms and conditions, tips, checklist tools, and even the forms used to apply for a consolidation loan.