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Student Loan Consolidation, also called a Student
Consolidation Loan, combines 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. 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 consolidation
loans for private loans as well.
Consolidation loans
often reduce the size of the monthly payment by extending the
term of the loan beyond the 10-year repayment plan that is standard
with federal loans. Depending on the loan amount, the term of
the loan can be extended from 12 to 30 years. (10 years for
less than $7,500; 12 years for $7,500 to $10,000; 15 years for
$10,000 to $20,000; 20 years for $20,000 to $40,000; 25 years
for $40,000 to $60,000; and 30 years for $60,000 and above.)
The reduced monthly payment may make the loan easier to repay
for some borrowers. However, by extending the term of a loan
the total amount of interest paid is increased.
In certain circumstances (for example, when one or more of the
loans was being repaid in less than 10 years because of minimum
payment requirements), a consolidation loan may decrease the
monthly payment without extending the overall loan term beyond
10 years. In effect, the shorter-term loan is being extended
to 10 years. The total amount of interest paid will increase
unless you continue to make the same monthly payment as before,
in which case the total amount of interest paid will decrease.
The interest rate on consolidation loans is 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%.
If a student consolidates their loans before they enter repayment,
the interest rate used is the lower in-school interest rate.
Thus, although the rounding up of the weighted average can potentially
cost the student as much as 0.12%, a student who consolidates
before entering repayment can save as much as 0.6%, a substantial
net savings. (The in-school interest rate is 1.7% plus the 91-day
treasury bill rate from the last auction in May. During repayment,
the interest rate is the 91-day T-bill rate plus 2.3%.)
This loophole has been confirmed by an excerpt from the Federal
Register
and direct correspondence with the US Department of Education.
Additional details can be found in the interest rate loophole
section. Some graduate students have found it necessary to consolidate
their educational loans when applying for a mortgage on a house.
To find out more about Student Loan Consolidation, check with
your lender.
Alternatives
Consolidation simplifies the repayment process but does involve
a slight increase in the interest rate. Students who are having
trouble making their payments should consider some of the alternate
repayment terms provided for federal loans. Income contingent
payments, for example, are adjusted to compensate for a lower
monthly income. Graduated repayment provides lower payments
during the first two years after graduation. Extended repayment
allows you to extend the term of the loan without consolidation.
Although each of these options increases the total amount of
interest paid, the increase is less than that caused by consolidation
Student loan consolidation programs allow for a borrower's loans
to be paid off and a new consolidated loan created. These programs
simply loan repayment by combining several types of Federal
education loans into one new loan. The interest rate may be
lower than on one or more of the underlying loans. Additionally,
the monthly payment amount on a consolidated loan is usually
lower and the amount of time to repay may be extended beyond
what was available in the separate loan programs. These features
generally result in more manageable debt and should make borrower's
less likely to default on the loan. If you have a federal student
loan, you may have already received marketing materials from
various lenders promoting their consolidation programs.
If all your loans are with the same lender and it offers loan
consolidation, you must stick with that lender. Likewise, borrowers
with just one loan can lock in the fixed rate, but must go through
the company that holds the loan. Borrowers with loans from multiple
lenders can consolidate with any. There are two particular features
to look for when searching for a loan consolidation program.
First, many lenders will cut your interest rate if you agree
to have payment deducted automatically from your checking account.
Likewise, they may cut your interest rate after you have made
several on-time payments. For legitimacy purposes, you may also
want to look out for lenders with toll-free customer service
phone numbers and adequate counseling programs. America’s
Student Loan Providers issued the following statement by Executive
Director Kevin Bruns in response to the newly released report
by the U.S. Government Accountability Office (GAO), titled,
“Federal Student Loans: Challenges in Estimating Federal
Subsidy Costs”:
“The GAO’s report is ‘deja vu all over again.’
For the second time this year, and about the sixth time in ten
years, independent experts conclude that federal budget rules
are flawed: They do not accurately compare the real, long-term
costs of the Federal Family Education Loan Program (FFELP) and
the Federal Direct Student Loan Program.
“GAO accepts the position of PricewaterhouseCoopers (PWC),
ASLP and others that the factors missing from the current government
estimates are significant, and that including them would give
a better estimate of the true program costs.
“In particular, GAO now accepts PWC’s and ASLP’s position that a true cost comparison would account
for
both
tax
revenues
generated
by FFELP
loan
providers
and
risks
to direct
loans
from
defaults,
consolidations
or interest
rate
fluctuations.
The
report’s
final
point
bears
repeating:
‘Consideration
of all
federal
costs
and
revenues
of
the
loan
programs
would
be an
important
component
of a broader
assessment
of the
costs
and
benefits
of the
two
programs.’
“Regrettably,
GAO’s
report
may
perpetuate
the
false
notion
that
direct
loans
cost taxpayers
less
than
guaranteed
loans.
It notes
the flaws
in the
government’s
estimates,
yet never
accounts
for them
while
comparing
the programs’
official
subsidy
rates.
Its
‘on the one
hand,
on the
other
hand’
analysis
is misleading
and disappointing.
“Nor does
the report
provide
any new
data or
make
any policy
recommendations.
We share
the requesters’
goal of
getting
better
cost
estimates,
and indeed
have
done
work
to facilitate
the
improvement
of the
estimates.
“ASLP’s
paper,
The Federal
Family
Education
Loan
Program:
A Better
Deal For Students
& Taxpayers
(July 12, 2005), remains
the only
serious
effort
to put
a dollar
figure
on the
impact
of flaws
in federal
budget
rules.
After
correcting
for
the obvious
errors
in program
cost
estimates,
we concluded
that
no significant
difference
exists
between
the
FFELP’s
costs
to taxpayers
and
the direct
loan
program’s.
“ASLP
found
that
the
subsidy
rate
for
the FFELP
is 7.62
percent,
not 9.40
percent,
as stated
in the
FY 2006
budget.
And
the Direct
Loan
program’s
subsidy
rate
is 7.67
percent,
not
1.76 percent."
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