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Consolidation Loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. It is very similar 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 Loans and Direct loans. Some lenders offer private consolidation loans for private education loans as well.

In the United States both the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDLP) include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.

Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.

Student loans are a great source of financial aid for students who need help paying for their education. Unfortunately, students often leave college with burdensome debt. In addition, they often have multiple loans from different lenders, meaning they are writing more than one loan repayment check each month. One solution to this problem is loan consolidation.

To understand loan consolidation, think of it as the same sort of payment option as refinancing a home mortgage. When you consolidate your student loans, the balances of your existing student loans are paid off and the amount you owe on each of the loans is rolled over into one big consolidated loan. The end result is that you have only one student loan and only one set of payments to make – or deferment forms to complete!

Both students and their parents can consolidate loans.

Should I consolidate my loans?
Loan consolidation offers many benefits:

- Locks in a fixed, usually lower, interest rate for the term of your loan, potentially saving you thousands of dollars (depending on the interest rates of your original loans)
- Lowers your monthly payment
- Combines all of your student loan payments into one monthly bill

In addition, consolidated loans have flexible repayment options and no fees, charges, or prepayment penalties. There are also no credit checks or co-signers required.

You should consider consolidating your loans if the consolidation loan would have a lower interest rate than your current loans, particularly if you are having trouble making you monthly payments. However, if you are close to paying off your existing loans, consolidation may not be worth it.

What will the interest rate for the consolidated loan be?
Your interest rate on your consolidation loan depends on when you took out your original student loans or parent loans and what the interest rate is on each loan.

The interest rate for your consolidated loan is calculated by averaging the interest rate of all the loans being consolidated and then rounding up to the next one-eighth of one percent. The maximum interest rate is 8.25 percent.

To figure your interest rate, visit loanconsolidation.ed.gov for an online calculator that will do the math for you.

How much can I save?
How much you save by consolidating loans depends on what interest rate you get and whether you choose to extend your repayment plan.

According to Sallie Mae, the leading provider of student loans in the United States, consolidating student loans can reduce monthly payments by up to 54 percent. However, the only way to reduce your payment this much is to extend your repayment plan.

Normally, you have to repay your student loans within 10 years. With a consolidation loan you can extend your repayment plan all the way up to 30 years, depending on the amount you’re consolidating.

Remember that if you choose to extend your repayment term, it will take longer to pay off your overall debt and you’ll pay more in interest. There are no preypayment penalties, so you can always choose to pay off the loan early.

Am I eligible to consolidate my loans?
In order to consolidate your loans, you must meet the following criteria:

- You are in your six-month grace period following graduation
- or you have started repaying your loans
- You have eligible loans totaling over $7,500
- You have more than one lender
- You have not already consolidated your student loans, or since consolidation you have gone back to school and acquired new student loans

The following types of loans can be consolidated:
# Direct Subsidized and Unsubsidized Loans
# Federal Subsidized and Unsubsidized Federal Stafford Loans
# Direct PLUS Loans and Federal PLUS Loans
# Direct Consolidation Loans and Federal Consolidation Loans
# Guaranteed Student Loans
# Federal Insured Student Loans
# Federal Supplemental Loans for Students
# Auxiliary Loans to Assist Students
# Federal Perkins Loans
# National Direct Student Loans
# National Defense Student Loans
# Health Education Assistance Loans
# Health Professions Student Loans
# Loans for Disadvantaged Students
# Nursing Student Loans

Where can I get a consolidation loan?
You can consolidate your loans through any bank or credit union that participates in the Federal Family Education Loan Program, or directly from the U.S. Department of Education. The loan terms and conditions are generally the same, regardless of where you consolidate. You may want to check first with the lenders that hold your current loans.

If all your loans are with one lender, you must consolidate with that lender.

If you decide to consolidate your student loans, remember that you can only do so
once unless you go back to school and take out more loans. Therefore, you will want
to make sure you get the best deal the first time. The interest rate will be the same from all lenders, but some lenders may offer future rate discounts for prompt payment and a discount for having monthly payments directly debited from your account.

Can my spouse and I consolidate our loans together?
You can consolidate your loans together, but it is not a good idea for a couple of reasons:

* Both of you will always be responsible to repay the loan, even if you later separate or divorce
* If you need to defer payment on the loan, both of you will have to meet the deferment criteria

When should I consolidate my loans?
You can consolidate your loans any time during your six-month grace period or after you have started repaying your loans. If you consolidate during your grace period, you may be able to get a lower interest rate. However, since you will lose the rest of the grace period, it is a good idea to wait until the fifth month of the grace period before consolidating. The consolidation process usually takes 30-45 days.

Consolidation loan lenders

Top consolidation lenders ranked by total FY 2006 consolidation loan originations
Lender name # of loans Amt of loans ($)
Federal Direct Student Loan Program 1,169,110 $19,197,268,873
Sallie Mae 866,295 $19,841,423,841
Citibank 232,126 $4,843,119,089
Nelnet 198,624 $4,796,065,812
NextStudent 89,284 $3,320,024,025
JP Morgan Chase 115,777 $2,668,451,098
Goal Financial, LLC 111,426 $2,494,856,673
College Loan Corporation 75,360 $2,245,128,826
AES/PHEAA 166,730 $2,037,618,548
Student Loan Xpress 114,790 $1,880,997,383
Wachovia Education 80,174 $1,674,979,763

Student loan consolidation was big trend in student loans in 2009. With the cost of living rising at an alarming rate and unemployment numbers climbing, many people are looking for ways to make their money go further. If a former student has more than one outstanding student loan, consolidation can save them time and money, freeing up cash every month for the payment of other bills.

Student loan consolidation is a great debt management technique. If you are having trouble paying your monthly bills because of the current economic climate, you are not alone. Consolidating your student loans will likely lower your monthly payment.

Be advised, though. Loan consolidation is not a magical cure to your debt. You will likely end up paying more over the course of your loan because you will incur more interest over the long term. But if you simply can’t pay your bills and you are in danger of losing your home or defaulting on your loans, consider student loan consolidation. It will preserve your credit rating, which will likely save you from paying high interest rates on every other loan you will need in the course of your lifetime.

Consider your consolidation options carefully. Find the best interest rate possible by shopping around and asking for the best offer possible. Try to also ask your current lender if they will offer you any incentives to keep you from consolidating with another company. It’s a long shot, but you never know what a bank has up their sleeve to keep your business.

The student loan market is in a state of flux. Like every other lending industry, they have been heavily impacted by the credit crunch. Be a smart consumer when you are hunting for financing to achieve your academic goals.
Interest Rates

The interest rate on a consolidation loan is usually the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.

For example, suppose a student has just unsubsidized Stafford Loans originated on or after July 1, 2006. These loans have a fixed interest rate of 6.8%. When they are consolidated by themselves, the consolidation loan will have an interest rate of 6 and 7/8ths of a percent, or 6.875%. So the interest rate increases only slightly.

If the borrower has a mix of loans with different 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 a percent, yielding a consolidation loan interest rate of 6.25%.

Note that the weighted average does not fundamentally alter the underlying cost of the loan. It preserves the cost structure by including each interest rate to the extent that it applies to part of the overall loan balance. For example, the consolidation loan in the previous paragraph says that of the $15,000 consolidation loan balance, $5,000 will be at 5.0% and $10,000 at 6.8%, yielding an equivalent interest rate of 6.2%.

If you are consolidating loans with different interest rates, the weighted average interest rate will always be in between. Don’t be fooled if someone tries to suggest that this will save you money by getting you a lower interest rate. The interest rate may be lower than the highest of your interest rates, but it is also higher than the lowest of your interest rates. More importantly, the amount of interest you pay over the lifetime of the loan will be about the same.

(For the mathematically inclined, there is a slight difference due to 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 monthly payment of $115.08 and total interest paid of $3,809.66, $5,000 at 5.0% has a monthly payment of $53.03 and total interest paid of $1,364.03. If you add these, you obtain a total monthly payment of $168.11 and a total interest paid of $5,173.69. Using the weighted average, $15,000 at 6.2% has a monthly payment of $168.04 and a total interest paid of $5,165.01. So using a weighted average yields a very small reduction in the monthly payment (in this case, 7 cents) and in the total interest paid ($8.68) due to a kind of triangle law. Of course, when you consolidate the interest rate is rounded up to the nearest 1/8th of a point, so $15,000 at 6.25% has monthly payments of $168.42 and total interest of $5,210.42, yielding a slight increase. So you pay a tiny bit of a premium for consolidation, due to the rounding up of the interest rate.

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