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A consolidation loan allows you to combine several types of federal student loans into a single loan with one monthly repayment and a fixed interest rate. Prior loans are paid off and a new loan with new terms and conditions is created. Consolidation is a debt-management strategy, not to be confused with “refinancing.” There are a limited number of lenders offering these types of products, and borrowers should weigh the risks before applying for any type of refinancing.
Below are some common questions about loan consolidation.
What kinds of loans can be consolidated?
Most federal education loans are eligible for consolidation. A partial list is below; contact your lender for more information.
Federal Subsidized and
Unsubsidized Stafford Loans
Federal Direct Loans
Federal Parent Loans (PLUS)
Federal Graduate Plus Loans
Federal Perkins Loan
Federally Insured Student Loans (FISL)
Auxilary Loan to Assist Students (ALAS)
Loan for Disadvantaged Students (LDS)
Supplemental Loans for Students (SLS)
You can also consolidate a prior Federal Consolidation Loan into a new Federal Consolidation Loan only if you are consolidating at least one other eligible student loan.
When can I consolidate?
You can get a Federal Consolidation Loan during your grace period, once you’ve entered repayment, or during periods of deferment or forbearance.
How can I get a consolidation loan?
Federal loans may be consolidated into a new, single loan with a fixed interest rate. For the Direct Loan Consolidation Center, please call 1-800-557-7392. Additionally, you may find helpful information on the Federal Direct Consolidation Loan website.
If you’re in default on a federal student loan, you still might be able to consolidate, provided the defaulted loan is not subject to a judgment or wage garnishment.
What’s the interest rate on a consolidation loan?
The interest rate for a consolidation loan is a fixed rate for the life of the loan. So, once you consolidate, your rate won’t change, regardless of what future rates might be. The fixed rate is based on the weighted average of the interest rates on the loans you consolidate, rounded up to the nearest one-eighth of a percent. The interest rate does not exceed 8.25 percent.
Are there any disadvantages to getting a consolidation loan?
Yes, there could be. Consolidation significantly increases the total cost of repaying your loans. Because you can have a longer period of time to repay, you’ll make more payments and pay more interest. In fact, consolidation can double total interest expense. So, compare the cost of repaying your unconsolidated loans with the cost of repaying a consolidation loan.
Consider whether you lose any borrower benefits if you consolidate, such as interest rate discounts or principal rebates—these can significantly reduce the cost of repaying your loans. Also, you might lose some discharge (cancellation) benefits if you include a Federal Perkins Loan.
Once made, consolidation loans can’t be reversed or canceled because the loans that were consolidated have been paid off and no longer exist. Take the time to study your consolidation options carefully before you apply, and talk to the holder of your loans for more information before you consolidate.
Excerpted from The Student Guide 2012 - 2013, published by the U.S. Department of Education.