Student Loan Consolidation
Consolidation Loans combine several student or parent loans into one bigger loan from the single lender, which is then employed to pay over balances on the other loans. It is quite comparable to refinancing a mortgage. Consolidation loans are available for most federal loans, including FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student education loans and Direct loans. Some lenders offer private consolidation loans for private education loans as well.
Most FFELP lenders are will no longer offering consolidation loans because they loans are will no longer profitable. Students can still consolidate their loans while using US Department of Education’s Federal Direct Loan Consolidation program at loanconsolidation.ed.gov even though their college does not participate inside the Direct Loan Program.
Student Loan Interest Rates
The interest over a consolidation loan will be the weighted average of the interest rates on the loans being consolidated, rounded up for the nearest 1/8 of a percent and capped at 8.25%.
For example, suppose a student just unsubsidized Stafford Loans originated on or after July 1, 2006. These plans have a fixed interest of 6.8%. When these are consolidated by themselves, the consolidation loan will provide an interest of 6 and 7/8ths of a percent, or 6.875%. So the eye rate increases only slightly.
If the borrower features a combination of loans with various interest rates, the weighted average will be somewhere in between. For example, if the borrower has $5,000 of Perkins Loans (at 5.0%) and $10,000 of unsubsidized Stafford Loans (at 6.8%), the weighted average is
$5,000 * 5.0% + $10,000 * 6.8%
—————————— = 6.2%
$5,000 + $10,000
This weighted average, 6.2%, is then rounded up to the nearest 1/8th of the percent, yielding a consolidation loan rate of interest of 6.25%.
Note that the weighted average does not fundamentally alter the root cost from the loan. It preserves the fee structure by including each interest rate for the extent it applies to part in the overall loan balance. For example, the consolidation loan inside the previous paragraph says that of the $15,000 consolidation loan balance, $5,000 will likely be at 5.0% and $10,000 at 6.8%, yielding an equivalent rate of interest of 6.2%.
If you might be consolidating loans with some other interest rates, the weighted average interest rate will always take between. Do not be fooled if someone efforts to suggest that this will help save money by getting which you lower interest rate. The rate of interest could be lower as opposed to highest of your respective interest rates, nonetheless it is also greater than the minimum of your respective interest rates. More importantly, the level of interest you pay over the lifetime in the loan will probably be in relation to the same.
(For the mathematically inclined, you will find there’s slight difference due for the different shapes of amortization curves at each interest rate. In the example given above on a 10 year term, $10,000 at 6.8% has a payment per month of $115.08 and total interest paid of $3,809.66, $5,000 at 5.0% has a payment per month of $53.03 and total interest paid of $1,364.03. In the event you add these, you obtain a total payment per month of $168.11 as well as a total interest paid of $5,173.69. Using the weighted average, $15,000 at 6.2% has a payment per month of $168.04 as well as a total interest paid of $5,165.01. So utilizing a weighted average yields an extremely small reduction within the payment (in this case, 7 cents) and in the total interest paid ($8.68) due to a type of triangle law. Of course, whenever you consolidate a person’s eye minute rates are rounded up on the nearest 1/8th of a point, so $15,000 at 6.25% has monthly obligations of $168.42 and total interest of $5,210.42, yielding a little increase. So you pay a little bit of your premium for consolidation, due towards the rounding up with the interest rate.
The PLUS loan interest loophole can help to eliminate a person’s eye rate on 8.5% set rate PLUS loans by 0.25% through consolidation.
If you were deferring the eye while on an unsubsidized Stafford Loan by capitalizing it, most lenders will add the capitalized interest to principal whenever you consolidate. (Lenders can capitalize interest at most of the quarterly, but most capitalize it once when the loans enter repayment or at other loan status changes.)
No Cost to Consolidate
Aside coming from a slight increase inside the interest rate on the consolidation loan, there’s cost-free to consolidate your loans. There are no fees to consolidate.
Under no circumstances pay a fee in advance to obtain a federal education loan or consolidate your federal education loans. There aren’t fees to consolidate your loans. While other federal education loans, such as the Stafford and PLUS loans, may charge some fees, the fees will more often than not be deducted in the disbursement check. There’s never an up front fee. If someone wants you to pay an in advance fee, chances are which it is surely an example associated with an advance fee loan scam.
Who Can Consolidate
Both student and parent borrowers can consolidate their education loans. (Students and parents cannot combine their loans through consolidation, since only loans through the same borrower may be consolidated. But they can consolidate their loans separately.)
Married students are no more capable to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible to the full amount in the loan, and the loans can’t be separated if the couple got divorced. To avoid such problems inside the future, Congress chose to repeal this provision as part of the Degree Reconciliation Act of 2005.
Students can only consolidate the amount loans throughout the grace period or as soon as the loans enter repayment. (Loans that will be in default though satisfactory repayment arrangements might also be consolidated.) Students can don’t consolidate while these are still in school. (The early repayment status loophole along with the ability of Direct Loan borrowers to consolidate through the in-school period was repealed as part with the higher Education Reconciliation Act of 2005, effective July 1, 2006.)
Parents, however, can consolidate PLUS loans at any time.
You Can Consolidate with Any Lender
Students and parents can consolidate their loans with any lender, even if all of the loans are having a single lender. (The single holder rule was repealed on June 15, 2006, as part in the Emergency Supplemental Appropriations Act of 2006. Borrowers no longer should exploit the single holder rule loopholes as a way to consolidate with any lender.) Direct Loans can be consolidated with any lender. This permits you to check around for a lender that supplies a lower rate or better discounts.
Most lenders require a minimum balance before they will consolidate your loans. For example, many lenders is only going to offer consolidation loans for borrowers with loan balances of no less than $7,500. A few lenders will offer consolidation loans for balances of $5,000 or more, and the Federal Direct Consolidation Loan program doesn’t have minimum balance for consolidation loans. (Lenders may well not discriminate against borrowers who seek consolidation loans on the basis of number/type of student loans, type/category of educational institution, the eye rate for the loans, or perhaps the type of repayment schedule sought through the borrower. Lenders are, however, in a posture to discriminate on the basis from the amount from the loans being consolidated, so lenders can set the absolute minimum balance for the loans.)
Which Loans Can be Consolidated?
Any federal education loan may be consolidated. You can even consolidate an individual 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 have to add loans that just weren’t previously consolidated on the consolidation loan. It can be done to also consolidate two consolidation loans together. But you can’t consolidate just one consolidation loan by itself. These restrictions are already in effect since early 2006.
Note that when you reconsolidate a consolidation loan, it lets you do not relock the rates for the consolidation loan. The consolidation loan is treated as being a fixed interest rate loan from the weighted average interest rate formula used to calculate the eye rate around 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 wish to preserve your ability to use consolidation inside future to switch lenders, you need to exclude certainly one of your loans through the consolidation.
Repayment Student Loan Plans
Consolidation loans provide usage of several alternate repayment plans besides standard ten-year repayment. These include extended repayment, graduated repayment, income contingent repayment (Direct Loans only) and income sensitive repayment (FFEL only). If you do not specify the repayment terms, you will receive standard ten-year repayment.
Consolidation loans often lessen the size with the payment by extending the term in the loan past the 10-year repayment plan which is standard with federal loans. Depending around the loan amount, the term of the loan could be extended from 12 to 30 years. The reduced payment per month may result in the loan simpler to repay for some borrowers. However, by extending the term of an loan the entire amount of interest paid over the lifetime from the loan is increased.
In certain circumstances (for example, when one or higher in the loans was being repaid in less than Ten years because of minimum payment requirements), a consolidation loan may reduce the payment per month without extending the overall loan term beyond 10 years. In effect, the shorter-term loan will be extended to 10 years. The whole amount of interest paid increases if you don’t continue to make exactly the same payment as before, in which case the total amount of interest paid will decrease.
You don’t need to pick another repayment plan. We recommend keeping standard ten-year repayment, because it will save money. The alternate repayment plans may have lower monthly payments, but this raises the term with the loan and also the total interest paid in the lifetime from the loan. See our caveat about extended repayment below.
Repayment over a consolidation loan will start within 60 events of disbursement of the loan, unless the borrower qualifies for an deferment or forbearance.
Federal education loans, including consolidation loans, don’t have a prepayment penalty. So you are able to pay back all or section of your federal education loans without incurring a penalty. If you want to adopt advantage of this, make certain to add a letter while using extra payment indicating it needs to be applied to reducing your principal. Otherwise, the lending company may treat it as being an advance payment from the next month’s monthly payment.
Tools for Evaluating Consolidation Options
FinAid’s Loan Consolidation Calculator can enable you to see the tradeoffs of consolidating your loans. It compares the reduction within the monthly loan payment while using increase inside the total interest paid over the lifetime of the loan. It also shows the interest on your consolidation loan.
Despite the switch the signal from fixed interest levels on Stafford and PLUS loans eliminating a key financial incentive to consolidate, there remain several good reasons to consolidate your education loans. These include creating a single monthly payment, use of alternate repayment plans, the PLUS loan interest rate loophole, and the power to reset the 3-year clock on deferments and forbearances. But consolidation can cut short the grace period, even though grace period loophole can function surrounding this problem. It is better to stop consolidating Perkins loans, as you lose several valuable benefits. Beware of extending the term of your respective loan, as this can raise the total interest paid over the lifetime from the loan; you can stick to standard ten-year repayment.
Before consolidating, always assess the benefits provided with the current holder of the loans. The loan discounts made available from originating lenders tend to become superior to people offered by consolidating lenders, since consolidation loans have tighter margins. Also, should you received a fee waiver or rebate through the originating lender, you could ought to repay that discount in the big event you consolidate with another lender. It might be possible to have some from the advantages of alternate repayment plans without consolidating, such as extended/graduated repayment using a loan term of around Two-and-a-half decades plus a single monthly payment, if you have more than $30,000 in federal education loan debt accumulated since October 7, 1998 with the lender. (This is due to a little known provision of the higher Education Act, in section 428(b)(9)(A)(iv), as well as the regulations at 34 CFR 682.209(a)(6)(ix).)
You can affect the repayment schedule in your loan once per year. So consider starting with standard ten-year repayment in your consolidation loan. You usually are not required to start off with extended repayment. In case you think it is challenging to afford the payments, you are able to always change to extended repayment later.