UNDERSTANDING
CONSOLIDATION
Loan consolidation is bringing all of
your loans together into one “folder” from one lender. Each loan is given the same interest rate
(the weighted average of all loan interest rates) that is locked in and will
not change. Do not be fooled if someone
tries to suggest that this will save you money by getting you a lower interest
rate. The interest rate may or may not be lower than the highest of your
interest rates. More importantly, the
amount of interest you pay over the lifetime of the loan will be about the
same. You should find an online
consolidation calculator to figure out if consolidation is right for you.
Both student and parent borrowers can
consolidate their education loans. (Students and parents cannot combine their
loans through consolidation, since only loans from the same borrower can be
consolidated. But they can consolidate their loans separately.)
Married students are no longer able to
consolidate their loans together. This provision was repealed, effective
Students can only consolidate their
education loans during the grace period or after the loans enter repayment.
(Loans that are in default but with satisfactory repayment arrangements may
also be consolidated.) Students can no longer consolidate while they are still
in school. (The early repayment status loophole and the ability of Direct Loan
borrowers to consolidate during the in-school period was repealed as part of
the Higher Education Reconciliation Act of 2005, effective
Parents can consolidate PLUS loans at any
time.
Students and parents can consolidate
their loans with any lender, even if all of their loans are with a single
lender. (The single holder rule was repealed on
Most lenders require a minimum balance
before they will consolidate your loans. For example, many lenders will only
offer consolidation loans for borrowers with loan balances of at least $7,500.
A few lenders will offer consolidation loans for balances of $5,000 or more,
and the Federal Direct Consolidation Loan program has no minimum balance for
consolidation loans. (Lenders may not discriminate against borrowers who
seek consolidation loans on the basis of number/type of student loans,
type/category of educational institution, the interest rate on the loans, or
the type of repayment schedule sought by the borrower. Lenders are, however,
able to discriminate on the basis of the amount of the loans being
consolidated, so lenders can set a minimum balance on the loans.)
Any federal education
loan can be consolidated. You can even consolidate a single loan. There are,
however, a few restrictions on consolidating a consolidation loan.
You can consolidate a
consolidation loan only once. In order to reconsolidate an existing
consolidation loan, you must add loans that were not previously consolidated to
the consolidation loan. You can also consolidate two consolidation loans
together. But you cannot consolidate a single consolidation loan by itself.
These restrictions have been in effect since early 2006.
Note that when you
reconsolidate a consolidation loan, it does not relock the rates on the
consolidation loan. The consolidation loan is treated as a fixed rate loan
within the weighted average interest rate formula used to calculate the
interest rate on the new consolidation loan. Consolidation does not pierce the
veil on previous consolidations.
The new restrictions on
consolidating a consolidation loan limit your ability to use consolidation to
switch lenders. Generally, you will consolidate your loans once, toward the end
of the grace period or after the loans enter repayment, and then be locked into
that lender for the lifetime of the loan. If you want to preserve your ability
to use consolidation in the future to switch lenders, you should exclude one of
your loans from the consolidation.
Pros and Cons to Consolidation