Student Loan Consolidation Programs

A federal consolidation loan combines all outstanding student loans into one manageable loan. All federal student loans qualify for student loan consolidation, including: Stafford, PLUS, Perkins, Direct loans, HEAL, SLS, Health Professional Student Loans, NSL and Guaranteed Student loans. Both parent and student borrowers can take out a federal consolidation loan; however, they must consolidate their loans separately. Due to a provision which took effect on July 1, 2006, married students can no longer combine their loans for consolidation purposes.

There is no fee to consolidate federal loans. Consolidation is only available after loans enter the repayment period or during the grace period. It is no longer possible for students to consolidate while they are enrolled in college. By contrast, parents are allowed to consolidate PLUS loans at any point in time. Borrowers can also consolidate loans that are in default where repayment arrangements are satisfactory.

Even if parents and students have all of their loans with one particular lender, they can choose to consolidate their loans with a different lender. This helps them obtain better savings and a lower rate. A minimum balance for loan consolidation is required by a majority of lenders.

Borrowers should consolidate federal and private student loans separately, since federal consolidation offers lower interest rates and greater advantages. The interest rate is computed by averaging the interest rates of the loans to be consolidated and rounding it up to 1/8 of a percent. The interest rate of a consolidated loan can be as low as 4.5%; it is capped at 8.25%. However, if a borrower extends the loan's term, the interest amount he will be required to pay over the lifetime of the loan will be higher.

There are no credit checks associated with federal loan consolidation. The repayment period is longer. A federal consolidation loan usually decreases the amount of the monthly payment, sometimes by as much as 60%, by extending the loan period beyond the standard 10-year repayment plan. The repayment period can range anywhere from 12 to 30 years depending on the size of the loan.