The following is a list of common questions about student loan
consolidation. These are genericized versions of actual questions
received through FinAid's free
Ask the Aid Advisor
service.
- Are there any minimum balances required to
consolidate?
Some lenders require a minimum balance before they will accept a
consolidation loan. Typically this is $7,500, although some lenders
will allow you to consolidate with only $5,000 in loans, and the
Federal Direct Consolidation Loan Program does not have a minimum balance.
- Does consolidation affect my credit rating?
No. Education debt is considered "good debt", as it represents an
investment that generally increases your ability to earn money to
repay debt. Even though consolidation may increase the term of the
loan, it does not appreciably change repayment behavior. (Defaulting
on your education loans, on the other hand, will negatively impact
your credit rating.)
- How do I go about consolidating my loans?
Although the repeal of the single holder rule means that you can
consolidate with any lender, it's generally a good idea to talk first with
the current holder of your loans. They have all the paperwork, so the
process is often simpler with the current holder of your loans. This
establishes a baseline against which you'll compare other lenders.
Another lender may offer better customer service or loan
discounts that make it easier to repay your loans. (Note that
completing a consolidation loan application takes only about half
an hour, so the paperwork burden is minimal even if you use another
lender.)
Until you receive notification that the consolidator has paid off your
original loans, continue making payments on those loans. You don't
want to go into default on those loans, since that would prevent your
consolidation loan application from moving forward.
- Are there any ways to save money through consolidation?
It can pay to shop around. Although federal law sets the rates on
student loans, those rates are the maximum rates. Nothing prevents a
lender from charging lower rates. Many lenders offer loan discounts
for having your monthly loan payments direct debited from your bank
account (e.g., 0.25% interest rate reduction). They may also offer an
interest rate reduction for making on-time monthly payments (e.g., 1%
interest rate reduction after 36 months of on-time payments for as
long as you continue making on-time payments).
Note, however, that if you are late with a single monthly payment, you
lose the interest rate reduction permanently. Less than 10% of
borrowers succeed in obtaining the full benefit of an on-time payment
discount. (Even borrowers who sign up for automatic direct
debit of the monthly payments can miss a payment if they have
insufficient funds in their account.)
We recommend focusing on the discounts that you can't lose, such as
discounts for signing up for direct debit of the monthly
payments. Next look for discounts that are more immediate in nature,
such as those that offer a reduction in principal or a rebate of the
loan fees. When a repayment incentive requires on-time payments,
prefer those that involve a shorter
time period before you can qualify for the discount. A discount that
is suspended for a short time period after you are late with a payment
is better than one that terminates after a single late payment.
Call your lender to ask about their
consolidation loan programs and any special discounts. Then shop
around by calling other lenders. The FinAid site includes a large list
of student loan providers, many
of whom offer student loan consolidation.
- Can parents consolidate PLUS loans? Should they?
Yes, parents can consolidate PLUS loans. Consolidating a
PLUS loan can yield some savings, since it reduces the interest rate
from 8.5% to 8.25% due to the cap on the interest rates of
consolidation loans. However, one must consider the impact of
consolidation on available student loan discounts.
- I have just one loan. Can I consolidate?
Yes, so long as the loan being consolidated is not itself a
consolidation loan. To reconsolidate a consolidation loan, you must be
including additional loans. Otherwise, you can
consolidate even just a single loan.
- I consolidated a few years ago. Can I consolidate again?
Consolidation loans may only be reconsolidated when you are adding
more loans to the consolidation. If you do not have other federal
education loans to include in the new consolidation loan, you cannot
reconsolidate a consolidation loan. Note that reconsolidating a
consolidation loan does not relock the interest rates on the loan.
- I have not yet graduated. Can I consolidate my loans?
No. The early repayment status loophole
was repealed, effective July 1, 2006. In addition, the ability of
Direct Loan borrowers to consolidate during the in-school period was
also repealed on this date. You can only consolidate during the grace
period or after your loans enter repayment. (If you drop below half
time enrollment status, your loans will be eligible for
consolidation. Summer enrollment and accelerated programs, however,
generally do not qualify
you to consolidate your student loans.)
- I qualified for a 2.25% discount on my unconsolidated
Stafford loans (i.e., 0.25% interest rate reduction for direct debit
and 2% interest rate reduction after 48 months of on-time payment). If
I consolidate, will I lose these benefits? Is it still worthwhile to
consolidate?
A consolidation loan is like a refinance. It is a new loan that pays
off the original loans. If you consolidate your loans, you will lose
any existing loan discounts, especially if you change lenders.
To determine whether it is worthwhile to consolidate, you need to
compare the value of the loan discounts you will get if you
consolidate with the value of the loan discounts you retain if you
don't consolidate.
If you have loans with Direct Lending, you may have to repay the 1.5%
rebate you obtained from Direct Lending if you consolidate with the
FFEL (bank-based) consolidation loan program.
- I don't remember who my lender is. Help!
The financial aid administrator at your college may be able to
help. You can also look up your lender online. See FinAid's
Lost Lender for information about the
National Student Clearinghouse's Loan Locator service and the NSLDS
Student Access.
- Can I consolidate private education loans? Can I
consolidate my Federal and private loans together?
You cannot consolidate private education loans into the Federal
consolidation loan program. However, some lenders offer
private consolidation loans
for those loans. We do not recommend including federal education loans
in a private consolidation loan, as this often increases the interest
rate. You will also lose several important benefits of the federal
education loans, such as flexible repayment terms and generous loan
forgiveness and cancellation provisions. Consolidate your federal
loans separately, with the federal consolidation loan program.
Note that in most cases the private consolidation loan is a variable
rate loan, so you aren't locking in a lower rate, just switching
lenders. There is at least one lender that offers a fixed rate private
consolidation loan, but they charge a 2% higher interest rate on the
fixed rate product than on their variable rate consolidation
loan. Whether this is worthwhile depends on whether you think interest
rates will continue to increase or not in the future.
