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Federal Student Loan Consolidation

What to Know about Federal Student Loan Consolidation

In the United States, the FDLP or the Federal Direct Student Loan Program is a program that allows include federal student loan consolidation, which can allow consolidation of a variety of federal student loans, such as Stafford loans and PLUS loans, into one simple loan. Federal student loan consolidation results in smaller monthly payments for the borrower and a longer repayment term for the consolidated loan. Unlike the individual loans, a consolidation loan has a fixed interest rate for the entire length of the loan.

The purpose of federal student loan consolidation is like that of a mortgage refinance in the sense that interest rate or monthly payments are ultimately lowered. Federal student loan consolidation services are available for all federal loans. This includes such as unsubsidized and subsidized Direct and FFEL Stafford Loans, Supplemental Loans for Students (SLS), Direct and FFEL PLUS Loans, Health Education Assistance Loans, Federal Nursing Loans, Federal Perkins Loans, and certain existing consolidation loans.

The Federal Loan Consolidation Program was first started in 1986. In 1998, the U.S. Congress adjusted the interest rate to have it set as a fixed rate weighted mean. Any loans that underwent Federal student loan consolidation before this time could still have a variable interest rate that was set by the particular FDLP loan origination center or FFELP lender.

In 2005, the GOA or Government Accountability Office considered consolidating these consolidation loans so they could be exclusively managed by the FDLP. However, calculations and assumptions about future changes in the loan volume, percentage of defaulters, and interest rates resulted in the estimate of an additional cost of $46 million for administrative costs which would then be offset by a savings of $3,100 million. However, the financial turmoil of 2008 resulted to the suspension of various loan consolidation programs, such as Nelnet, Next Student, and Sallie Mae.

Federal Student Loan Consolidation Restrictions

Nearly all federal education loans can be consolidated, but there are a few set restrictions on student loan consolidation.

Federal student loan consolidation can only be used once. In order for an existing consolidation loan to be eligible for reconsolidation, more loans must be added that were not previously consolidated into the original student consolidation loan. After 2006, an individual consolidated loan could not be consolidated by itself.

The new restrictions concerning consolidating a consolidation loan obstruct the ability to use consolidation when switching lenders. Usually, loans can consolidate once, near the completion of the grace period given for the loan or once the original loan goes into repayment. It is then locked into that particular lender for the total time of the loan. In order to maintain the ability to use various student loan consolidation services later on when switching lenders, it is ideal not to include at least one loan from the federal student loan consolidation process in order to maintain eligibility for reconsolidation.

When a consolidated loan is reconsolidated into a new loan, this process does not relock the interest rates on the new consolidation loan. Rather, the consolidation loan is thought of as a fixed rate loan when recalculating the weighted average interest rate that is then applied to find the new interest rate for the consolidation loan.

Federal Student Loan Consolidation Repayment Plans

Federal student loan consolidation gives access to many different repayment plans along with the standard 10-year repayment plan. Some of these different repayment options include income sensitive repayment for FFEL loans, contingent repayment for direct loans, graduated repayment, and extended repayment.

Federal student loan consolidation can also reduce the total cost of the monthly payment by increasing the repayment period of the loan beyond the standard 10-years as normally stated in terms of various student federal loans. Depending on the total amount of the loan, the repayment period of the new consolidated loan can be furthered anywhere from 12 years to 30 years. The smaller monthly payment can make it less financially stressful on the borrower to repay but will result in an increased cost of interest paid over the loan’s lifetime. 

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