Loan consolidation is one option that most student loan borrowers consider at some point. And while the reasons why a borrower may choose to consolidate vary, most borrowers consolidate in order to:
- Combine multiple student loan balances under a single lender, so that the borrower has to make only one monthly payment, and
- Lock in a fixed interest rate for the entire repayment period of the Consolidation loan.
Keep in mind that you are not required to consolidate your loans. Consider the issue seriously before making a decision. See "Frequently asked questions" for more information.
Due to market conditions, many lenders are not currently offering consolidation loans. If you are considering student loan consolidation, please contact your existing lender(s) for more information about possible consolidation options.
The following sections will give you a general overview of the Federal Consolidation Loan Program to help you decide if consolidating is right for you.
To qualify for a Federal Consolidation loan, you must be in your grace period or have entered repayment on each loan that is selected for consolidation. If you decide to consolidate, keep in mind a few things about interest rates.
A Stafford loan that was first disbursed before July 1, 2006 has a variable interest rate. The rate is lower while you are in school, in your grace period, or in deferment. It increases once you enter repayment. So, if you have Stafford loans with a variable interest rate, you may want to take advantage of consolidation while you are in your grace period or during deferment. By consolidating during one of those times, the interest rate on your Stafford loans that is used to determine the interest rate on your Consolidation loan is up to 0.6% lower.
A borrower seeking a Consolidation loan can consolidate several different types of Federal education loans. The types of loans that you may include in a Consolidation loan are:
- FFELP loans (Stafford, PLUS, SLS, and prior Consolidation loans)
- FDLP loans (Stafford, PLUS, and prior Consolidation loans)
- FISL loans
- Perkins loans (formerly National Student Defense Loans)
- Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS)
- Nursing Student Loans (NSL)
- Health Education Assistance Loans (HEAL)
Keep in mind that there may be disadvantages to including a Perkins loan in a Consolidation loan. See "Frequently asked questions" for more information.
Consolidation gives you one payment with one lender. If you consolidate all of your student loans, you will have to make payments to only one lender — less paperwork, less hassle.
If you are currently in default on a student loan, you may not be eligible for loan consolidation. Learn more about repaying your defaulted student loan at TG Online.
You can consolidate during a period of deferment, and, in some cases, this may allow you to obtain a lower Consolidation loan interest rate. If you have variable-rate Stafford loans that were first disbursed before July 1, 2006, the interest rate on those loans actually has two levels. The interest rate is lower when you are in school, in your grace period (the six months after you leave school before you have to start paying back your loans), and in periods of deferment. The interest rate is higher when you are in repayment. So, if you consolidate a variable-rate Stafford loan while you are in a period of deferment, the interest rate on that loan can be up to 0.6% lower, which will have a positive effect on the calculation of your Consolidation loan interest rate.
If you consolidate during an in-school deferment keep in mind that you can only include loans that have been fully disbursed in your Consolidation loan. So any future loans that you intend to take out while continuing your education will have to be repaid separately, which may somewhat complicate your repayment process.
The interest rate on a Consolidation loan is the weighted average of the interest rates (as of the date the application is received by the lender) on all of the loans you are consolidating, rounded up to the nearest one-eighth of a percent. For example, let's say that you have:
- $20,000 in Stafford loans at a 6.8% interest rate
- $10,000 in Perkins loans at a 5% interest rate
If you consolidate these loans, your Consolidation loan amount will be $30,000.
To calculate your Consolidation loan interest rate, multiply each loan's debt by its current interest rate, add those amounts together, and divide that sum by the total loan debt.
- 20,000 X 6.8% = 1360
10,000 X 5% = 500 - 1360 + 500 = 1860
- 1860/30,000 = 6.20%
- Don't forget that the interest rate is rounded up to the nearest one-eighth of a percent, which will bring your Consolidation loan interest rate to 6.25%.
If you decide to consolidate, you should keep in mind that it is best to consolidate at a time and in a way that will be most advantageous for you, particularly with regard to the interest rates of the loans that you want to consolidate. Here are a few things to consider:
- If you took out a Stafford or PLUS loan first disbursed on or after July 1, 2006, it carries a fixed interest rate of 6.8% or 8.5%, respectively.
- However, if you took out a Stafford or PLUS loan first disbursed before July 1, 2006, it carries a variable interest rate that is adjusted annually on July 1 (and remains in effect through the following June 30). The new interest rates for variable-rate Stafford and PLUS loans are announced each year in late May, which gives you a chance to see if the rates will increase or decrease.
Note: Stafford loans that have variable interest rates actually have two levels of rates. The interest rate is lower when you are in school, in your grace period (the six months after you leave school before you have to start paying back your loans), and in periods of deferment. The interest rate is higher when you are in repayment. So, if you consolidate a variable-rate Stafford loan while you are in your grace period or while you are in a period of deferment, the interest rate on that loan can be up to 0.6% lower, which will have a positive effect on the calculation of your Consolidation loan interest rate.
With a Consolidation loan, the maximum length of your repayment period depends on the total balance of all of your education loans, regardless of whether you consolidate every loan. You may be allowed a repayment period that is anywhere from 10 years to 30 years. By choosing a longer timeframe, your monthly payment may be lower, but this choice may cause you to pay a higher amount of interest over the additional years of repayment. See "Repayment Charts" for more information.
If you have questions about whether you qualify or not, contact your lender first. TG can also help. Call TG customer assistance at (800) 845-6267, or send an e-mail message to cust.assist@tgslc.org.