Federal Loan Consolidation
What is Federal Loan Consolidation?
Federal Loan Consolidation is a process that allows you to combine all your federal student loan debt into one consolidated loan. For example, if you have federal loans with multiple lenders, a consolidation will pay off the balances with those lenders and create one new loan for the entire balance (see example below) with a new lender.
| |
Before consolidation |
After consolidation |
| Lender 1 |
$10,000 |
$0
|
| Lender 1 |
$5,000 |
$0
|
| Lender 2 |
$2,500 |
$0
|
| Lender 3 |
$3,500 |
$0
|
| Consolidation Lender |
|
$21,000 |
Why Do I Need a Federal Consolidation Loan?
- Potentially Lower Monthly Payments
Unless your federal student loan balance is over $30,000, the standard loan term for federal student loans is 10 years. A federal student loan consolidation may extend the term of your loan, based on your total student loan balance:
| Student Loan Consolidation Balance |
Repayment Term |
| Less than $7,500 |
10 years |
| $7,500-$9,999 |
12 years |
| $10,000-$19,999 |
15 years |
| $20,000-$39,999 |
20 years |
| $40,000-$59,999 |
25 years |
| $60,000+ |
30 years |
When you lengthen your repayment term, your monthly payments will likely decrease (depending on your balance). You can use the Department of Education’s loan calculator to calculate your monthly consolidation loan payments. Many graduates use federal loan consolidation because they cannot afford student loan payments on their starting salary. Even though you are lowering your monthly payments, you can always pay more than the minimum, because there is no prepayment penalty.
- One Monthly Payment
In addition to lower monthly payments, many borrowers enjoy the convenience of having to make only one student loan payment every month.
- Federal Program Benefits
Federal loan consolidation is free and there are no credit checks. You will also have the same deferment and forbearance benefits that you had with your federal student loans.
- Resolve Delinquency
Consolidating your loans may help you get a “fresh start.” When you consolidate, you will pay off your existing loan(s), thus resolving the delinquency and adverse credit reporting on your loan(s) and starting current with your new consolidation loan.
Student Loan Consolidation Rates
Formula for Federal Student Loan Consolidation Rates:
Federal loan consolidation rates are determined by taking the weighted average of your current loan’s rates, and rounds them up to the nearest 1/8%.
Provided below are weighted average applications so you can see how consolidation rates are calculated.
Example 1:
| |
Amount |
Interest Rate |
| Loan 1 |
$1,000 |
5% |
| Loan 2 |
$1,000 |
6% |
| Weighted Average Interest Rate |
|
5.5% |
Example 2:
| |
Amount |
Interest Rate |
| Loan 1 |
$1,000 |
5% |
| Loan 2 |
$20,000 |
6% |
| Weighted Average Interest Rate |
|
5.95% |
The formula in the above examples calculate the weighted average interest rate as follows:
- Multiply loan by interest rate: $1K * 5% ($50); $20K * 6% ($1,200) = $1250 (Total Weight Factor)
- Add loan amounts: $1k + $20K =$21K (Total Loan Amount)
- Divide the Total Weight Factor by the Total Loan Amount and multiply by 100. 1250/21000 =5.95%
Then, you round the weighted average interest rate up to the nearest 1/8%.
| Weighted Average Interest Rate |
Consolidation Loan Rate (rounded to nearest 1/8%) |
| 5.5% |
5.5% |
| 5.95% |
6% |
You can find your loan balances and interest rates on your student loan statements or by contacting your lender. Remember that once you consolidate, your interest rate will be a fixed rate for the life of your loan.
Important Notice: If you have federal student loans that were taken out before June 30, 2006, your loans are likely variable. If you have variable rate loans, your interest rate changes every year on July 1 and your payment amount may be adjusted every year.
On July 1, 2009, variable student loan rates reached their lowest rates in history (as low as 2.48% for Stafford Loans and 3.28% for PLUS Loans). If you consolidate before the rates change again on July 1, 2010, you can lock in your low interest rate. Since rates can go up and down, locking in your low interest rate could save you thousands of dollars in interest over the life of the loan.
Where to Get a Student Loan Consolidation
If you are interested in consolidating your student loan debt, you should contact the Department of Education. You can visit the Department of Education’s student loan consolidation website at www.loanconsolidation.ed.gov.