Loan consolidation is the process of obtaining one new loan to cover all of your existing loans. The purpose of consolidating is to simplify the payment process but also to reduce the amount of your monthly payment or obtain a lower interest rate. Right now interest rates are extremely low.

Private loans can be consolidated with other private loans but the rate is usually variable. For private loan consolidation, you will need to make sure that your credit is good by getting a free credit report.

Both federal and private loan consolidation will come with new conditions. If your monthly payment amount is reduced, the total number of payments can increase. Borrowers should read the fine print before consolidating.

Under Department of Education programs, Federal loans, including Stafford, Perkins, Direct plus and Supplemental loans can be consolidated into one loan. The new interest rate is the average among the loans which were combined.

The maximum rate of interest on the consolidation of federal student loans should be 8.5%. This rate is set by the Department of Education and is a fixed rate of interest. You should be able to apply for a consolidation even if your loans are in default.

When reviewing the terms of your new loan, be sure to ask these kinds of questions:

What is the maximum rate of interest?

  • How much will the interest rate go up over time?
  • Are there any origination fees?
  • Will I loose the ability to request a deferment or forbearance (obtain hardship protection or assistance)?
  • Are there co-signer requirements?
  • Can the co-signer be dropped?
  • Are there any prepayment penalties?

A loan consolidation should only take 60 to 90 days to process. For Department of Education transactions, any new Direct Loan could be added to a consolidated loan within 180 days.

In order to qualify for Income-Based Repayment (IBR), do not include your Parent PLUS loans in a Direct Consolidation Loan.