Federal Student Loan Consolidation
A Federal Direct Consolidation Loan allows borrowers to combine multiple federal student loans into one loan. Most federal student loans are eligible for consolidation. Private student loans are not eligible for Direct Loan Consolidation.
There are a number of considerations to evaluate when deciding if loan consolidation is right for you. There can be benefits, such as helping to simplify your loan payments or helping you to qualify for certain repayment plans. However, there may also be drawbacks, such as losing borrower benefits tied to the original loan. Also, if you are extending your repayment in order to lower your payment, you will be adding more interest to the loan in the long term. Select the shortest repayment time that you can afford. The shorter the length of the loan, the less interest you will be paying in the long run.
It is important that you consider your options carefully because once you consolidate your loans, you cannot change your mind.
The online federal student loan consolidation application is available at www.studentloans.gov. You will need your FSA ID to sign in. Once you log in select “Complete Consolidation Loan Application and Promissory Note”. The process is free, there are no fees to complete a Direct Loan Consolidation application.
The interest rate on your consolidated loan is calculated based upon the weighted average of your qualifying loans, rounded to the nearest higher one-eighth of one percent.
A weighted average takes into account both the interest rate and the amount of each loan. Below we will walk through an example to help demonstrate how a weighted average is calculated.
Example: Willie Wildcat
It’s June 2015. Willie Wildcat just graduated and he is currently in his grace period. He received a Federal Direct Subsidized Stafford Loan for each year he was an undergraduate. His loans and interest rates are as follows:
- Loan #1: 2011-12 $3500 3.4%
- Loan #2: 2012-13 $4500 3.4%
- Loan #3: 2013-14 $5500 3.86%
- Loan #4: 2014-15 $5500 4.66%
Determine “per weight factor” of each loan by multiplying the loan amount by the interest rate:
- Loan #1: 3500 x 3.4% = 119
- Loan #2: 4500 x 3.4% = 153
- Loan #3: 5500 x 3.86 = 212.3
- Loan #4: 5500 x 4.66 = 256.3
Next add up each loan to determine the total of 740.6
Divide this total by the total loan amount
740.6 / 19,000 = 3.89789
Round up to the nearest 1/8 = 4%
Some things you may want to consider
- Timing is important. If you have loans that are still in the grace period, you will be presented with the option of having application delayed until closer to the end of the grace period.
- Perkins Loan borrowers considering consolidation should weigh out their options carefully. Consolidating your Perkins Loan will forfeit the cancellation benefits that are unique to that loan program and interest does not accrue when the Perkins Loan is in deferment which is also a benefit that would be lost with a consolidation.
- You cannot consolidate a Parent PLUS Loan (which is under your parent’s name) with a federal loan that is in your name under a Direct Loan Consolidation in order to transfer the debt from one individual to another. However the parent can consolidate the loan themselves if they choose.
- Spouses cannot consolidate their loans into one loan under a Direct Loan Consolidation.
- Private loans cannot be consolidated with the Federal Consolidation Loan. However, your application will ask you about your private loan debt in order to help you select the best payment plan for your circumstances.
- Loans that have an “in-school” status are not eligible for consolidation.
- Federal Student Aid Loan Consolidation Information
- Consumer Financial Protection Bureau: Repay Student Debt