- Consolidation -
In recent years you may have heard about Consolidation. Many of you have probably received a number of solicitations to consolidate your loans and may be questioning what to do. Review the information provided below about Federal Consolidation. Carefully take into consideration your loan portfolio and recent changes in legislation before making a decision whether or not to consolidate your loans.
NOTE: There is a difference between Federal Consolidation and Private Consolidation. You can ONLY consolidate federal loans (Stafford, Plus, Perkins, and Federal Consolidated Loans) into a Federal Consolidation (which is outlined below). The terms and conditions of a Private Consolidation is set by the lender. Ask your lender directly for more details. Make sure to specify the type of consolidation you are asking about (Federal or Private). Feel free to contact our office (202-319-5143 or firstname.lastname@example.org) for additional assistance.
- Consolidation -
I. What is a Federal Loan Consolidation Program (FLCP)?
The FLCP was originally established as a debt management tool. It allows for borrowers to bundle together eligible federal school loans into a single new loan with the benefits listed below:
+ Fixing the interest rate at a weighted average
(locking-in an interest rate for the life of the loan)
+ Extending the repayment term up to 30 years
(reducing their monthly minimum payment)
+ Retaining key federal student loan advantages
(such as deferments and forbearances)
However, there are downsides to consolidation:
- Immediate Repayment:
You loose your grace period. (however, deferments and forbearances are available to delay repayment)
- Higher Total Repayment:
You benefit with lower monthly payments, but extending the life of your loan, increases the overall amount paid.
- Fixed Interest Rate:
If in the future interest rates drop very low again, borrowers can not take advantage of that low rate.
Take a look at your loan terms and rates:
Stafford and PLUS Loans borrowed before July 1, 2006 are at a variable rate (91-day T-bill rate + 2.3%) capped at 8.25%, that resets July 1st of every year. In previous years, the variable rate of the Stafford and PLUS Loans were really low. However, currently these loans are at 7.22% and 8.02% (until July 1st, 2008) respectively. If you consolidate these variable rate loans today, your rate will be a weighted average between the two rates (somewhere between 7.250% and 8.125%. If your goal is to lock in a low interest rate, you should hold off on consolidation until the interest rates are low again. You can check www.FinAid.org in late May/early June of every year to see what the new interest rate will be for the upcoming year (July 1st to June 30th).
Stafford and PLUS Loans borrowed on/after July 1, 2006 already have much of the benefits offered through federal consolidation. The loans are are at a fixed rate (6.8% Stafford and 8.5% PLUS), the repayment term can be extended up to 25 years, and similar advantages are offered without having to consolidate. Unless you have multiple federal loans scattered across multiple lenders and want to bring them all under one lender for your convenience, OR you want to utilize the Public Service Loan Forgiveness program, there is no significant benefit in consolidating your fixed-interest federal loans. But you can if you want to.
The interest rate is fixed and is based on a weighted average of loans being consolidated, rounded up to the nearest 1/8 of one percent, capped at 8.25%.
Example: If you have 3 different loans at 3 different interest rates, you would calculate the weighted average as follows.
Step 1: Calculate Sum of Loans and Sum of Interest Amount (in dollars).
Loan Amount Interest Rate
Loan A: $18,500 x 7.22% (0.0722) = $1,335.70
Loan B: $20,500 x 6.80% (0.0680) = $1,394.00
Loan C: $41,000 x 8.50% (0.0850) = $3,485.00
total: $80,000 total: $6,214.70
Step 2: Divide Sum of Interest Amount by Sum of Loan for the New Interest Rate.
$6,214.70 / $80,000 = 0.0777 = 7.77%
Step 3: Round the New Interest Rate up to the nearest 1/8th percent.
7.77% rounded up to the nearest 1/8% = 7.875%
**** Your Consolidated Loan amount is $80,000 at 7.875% ****
Utilize Easy-to-Use Online Calculators
Most Lenders have available on their website a calculator to help you determine your weighted average interest rate. The Department of Education also has an Interest Rate Calculator on their website. For further assistance, feel free to contact your lender directly and a consolidation expert can help you do the calculations for you over the phone.
III. What are the Repayment Terms and Payment Plan Options for a FLCP?
Your Repayment Term and Your Payment Plan will decide how much and how long your monthly payments will be. The maximum length of the Repayment Term is based on the sum of your total student loan debt listed on your Federal Loan Consolidation Application <See chart below>. Most Law students will have borrowed $60,000 or more in education loans and will qualify for the maximum repayment term of 30 years.
Total Student Loan Debt
Eligible Repayment Term
$12,500 or more
$20,000 or more
20 years *
$40,000 or more
$60,000 or more
* For eligible borrowers, this term may be extended
using the Extended Repayment option..
There are four basic types of Payment Plans: Standard, Graduated, Income-Sensitive, and Extended. These payments plans provide you with the flexibility to cater to your specific financial situation. Please visit our Repayment Options webpage or contact your lender for more detailed information.
IV. Should I Consolidate?
Everything is permissible, but not everthing is beneficial. (1 Corinthians 10:23). Federal Consolidation is an option for all borrowers with Federal Loans; However, depending on your loan portfolio and your priorities (locking in a low interest rate or fixing the interest rate, lowering your monthy payments or strategically targeting your loan debt, etc.) it may or may not be the best thing for you to do. Weigh the pros and cons of Federal Consolidation as discussed on this page and then decide whether or not it would be more beneficial for you to consolidate all or part of your federal loans.
Timing is everything (Ecclesiastes 3:1). Students can choose to consolidate their federal loans at any time after graduation and during repayment. Students do not need to make a decision about consolidation immediately after graduation. You can choose to wait to consolidate 6 months after graduation to take advantage of the 6 month grace period on your Stafford loans. You can choose to wait to consolidate until your variable rate Stafford loans are at a lower interest rate, so that your variable Stafford loans will be fixed at that lower rate. You can choose to wait until you secure a Public Service position, then consolidate to take advantage of the Public Service Loan Forgiveness program. You can also choose to not ever consolidate.
Our office can not tell you what to do, but we can help you think through and weigh all considerations for your financial situation. For your convenience, loan repayment scenarios are available to help illustrate the effects of extending the repayment term and consolidation. Note: some rounding for simplicity was employed and calculations do not include accrued interest so your actual payment amounts will vary. If you have any questions, feel free to drop by our office for a one-on-one counseling session.
IV. What is the Application Process for a FLCP?
The timing of the application process will vary for each borrower, however the general application process is outlined below. Please contact your lender directly for specific deadlines and processing time.
Step 1: Identify Your Loan Portfolio.
Gather your loan information. Make sure to include the Loan Disbursement Date, Lender Information, Type of Loan, Principle Balance Due, Current Interest Rate, Interest Accrued and any other information you may find important. If you don't have your loan information, it's easy to find. You can either contact your lender directly and ask or visit the National Student Loan Data Systems' (NSLDS) website at www.nslds.ed.gov. You will need to provide your social security number and FAFSA PIN number.
Step 2: Make sure your loans are in Repayment, Deferment, Forbearance, and/or Grace Period.
If you are currently in school, you are not eligible to consolidate your loans. You can request and complete the application before you graduate, but you will have to wait until your graduation date to submit the FCL application. (You should only do so if you are confident that you are going to consolidate that loan and willing to loose your grace period.) Note: You do NOT have to consolidate immediately upon graduation. You have the option to consolidate at any time during the life of your loan as long as your total education loan debt (federal & private) is above $12,500.
Step 3: Complete the Federal Consolidation Loan Application.
Contact your lender and request a Federal Consolidation Loan Application. Most lenders have one available online at their website. You will need your loan information from Step 1 to complete the application.
Step 4: Follow up with the Lender.
It is strongly recommended that you contact your lender to confirm that they have your application in their system. Once your lender receives your completed application, it may take up to 8 weeks to process. You should continue to make any monthly payments required on your loans until your lender confirms your consolidation has been processed.
Step 5: Prepare to Pay your 1st Monthly Payment.
Your lender will contact you with loan terms and repayment plans regarding your newly consolidated loan. Depending on your Repayment Term and your Payment Plan, your monthly minimum will vary. Find out how much your minimum monthly payments are and when your 1st payment is due. Typically, the 1st payment is due within 30 to 60 days of your consolidation date. !Please Plan Accordingly!
*** If you find that you are unable to meet your monthly payment obligations, don't be an ostrich - sticking your head between your legs and ignoring the situation. Contact the lender right away and they will work with you. You may qualify for a deferment or forbearance that will allow you to postpone making principal payments on your loans for a few months.