Consolidation

The purpose of consolidating is to simplify the repayment process but also to reduce the amount of your monthly payment or to lock-in a lower interest rate.  Consolidation can also bring your loans out of default status.

Under Department of Education regulations, Federal Student Loans including Stafford, Perkins, Direct PLUS and Supplemental loans can be consolidated into one loan.  The new interest rate will be 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 a fixed rate of interest.  You may be able to apply for a Direct Loan Consolidation even if your loans are in default.

Many borrowers will be eligible for an Income-Based or Income-Contingent Repayment Plan.  These federal programs are outlined by the Department of Education and can modify and/or reduce the amount of your monthly repayment based on your tax return data and your individual circumstances.  However, Direct Loan Consolidations with reduced monthly payments and/or extended repayment periods can cost you more in interest over the life of the loan.

Most Direct Loan Consolidations are processed by the Department of Education in 45 to 90 days.  You may also have 180 days to fold in any new Direct Loan that you receive.  You can submit your own application for Direct Loan Consolidation directly to the Department of Education by going to loanconsolidation.ed.gov

If you will be using a Direct Consolidation Loan as a way out of default, collection efforts should cease and you will become eligible for grants and loans again.

The Department of Education has many regulations regarding the consolidation of student loans.  For example, if you have a Perkins Loan, you will lose Perkins cancellation rights if you obtain a Direct Consolidation Loan.  Alternatively, If you include your Parent PLUS Loans in a Direct Consolidation Loan you will lose eligibility for Income-Based Repayment.

A loan consolidation pays off your previous loans and requires careful consideration.  Keep in mind, consolidation is not the only way out of default.