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Federal Consolidation Loans allow borrowers to combine their federal education loans into a single loan with one monthly payment, which can be significantly lower than the payment required under the standard 10-year repayment option. Most borrowers with Federal Stafford, PLUS, Perkins and other federal education loans are eligible for the Federal Consolidation Program.
Consolidation loans are provided by banks, secondary markets, credit unions and other lenders under the Federal Family Education Loan Program (FFELP), and by the federal government under the Federal Direct Loan Program. In general, consolidation loans issued under the FFELP and the Federal Direct Loan Program carry the same terms and conditions.
ED Guidance - June 2006 and December 2006
Dear Colleague Letter GEN 06-12, dated June 2006 and Dear Colleague Letter GEN 06-20, dated December 2006, provides guidance from the U.S. Department of Education regarding the FFELP Consolidation Loan Program relative to the repeal of the single holder rules and regarding consolidation of defaulted FFELP loans.
In order to counsel student loan borrowers, financial aid administrators should be aware of the following:
- FFELP borrowers whose loans are currently in a grace period may consolidate their loans. Depending on the lender, borrowers may have the option of waiving their remaining grace period if doing so would result in a lower interest rate. Borrowers should contact their lender for details.
- Borrowers should be aware that, if they choose to waive their grace period, the waiver is permanent and cannot be rescinded.
- FFELP borrowers whose loans are in repayment status and who have not already consolidated their loans may choose to consolidate now. Any repayment status is eligible, including deferment, forberance and payment. Borrowers whose ISAC-guaranteed loans are in default status may contact the ISAC Collection Services Department at 800.WE.HELP2 to discuss potential loan consolidation options.
- In-school consolidation is not allowed in the FFELP or Direct Loan Programs.
ISAC Specific Requirements
ISAC has specific requirements for the Federal Loan Consolidation Program that a borrower must meet.
ISAC will guarantee Federal Consolidation Loans based on the following policy.
- A defaulted loan(s) may be included for consolidation through ISAC only if the underlying defaulted loan(s) is currently held by ISAC and the total balance of all loans included at the time of consolidation is $5,000 or greater. Borrowers may not consolidate a defaulted Federal Direct Loan or a defaulted loan held by another guarantor through ISAC.
- Other than a Federal Direct Loan, a borrower may not include for consolidation any loan currently held by the U.S. Department of Education (ED) (i.e. subrogated loan).
unILoan Program
ISAC’s loan consolidation program, unILoan, enables borrowers to combine various educational loans into a single, manageable loan. Through this federal program, a borrower can extend the repayment terms of various loans, based on the dollar amount of loans being consolidated. Income sensitive repayment schedules are also available. Limited deferment categories are available, and portions of the consolidated loan may be eligible for interest subsidy during the deferred period. The unILoan Worksheet will help determine which of a borrower’s existing loans qualify for consolidation and provide additional information about the program.
Consider the Cost
There are several advantages and disadvantages to consolidating loans. Some of the advantages include:
- Ease of payment – make one payment for all loans consolidated;
- Lower monthly payments – the payment period may be extended beyond 10 years, depending on the amount of student loan debt outstanding;
- Interest rate – the consolidated interest rate locks into a rate for the life of the loan (for most loans); and
- Repayment options – a variety of plans helps the student tailor his/her repayment program to his/her financial needs and goals.
Some disadvantages include:
- Higher overall costs – the extended repayment period can result in significantly higher costs over the life of the loan;
- Long-term debt – the student might be making payments when he/she is planning for retirement;
- Consolidate only once – in most cases, the student can consolidate his/her student loans only once. If interest rates fall in the future, borrowers who already have consolidated will not benefit from further rate declines; and
- Other complications – the student may lose eligibility for certain deferments only available on individual loans. If the student consolidates before their Stafford loan grace period ends, the student’s grace period terminates. The student may also lose lender-provided incentives currently available on individual loans.
Consolidation Comparison Table
|
Total Loan Amount |
Current Monthly Pmts.* |
Total Pmts. |
Maximum Loan Cons. Term |
New Monthly
Pmts. (@8%) |
Total Pmts. |
|
$10,000 |
$123 |
$14,700 |
15 Years |
$96 |
$17,130 |
|
$20,000 |
$245 |
$29,457 |
20 Years |
$167 |
$40,250 |
Application Process
For FFELP loans, there is a common FFELP Federal Consolidation Application and Promissory Note that can be used by the student borrower that would like to consolidate his/her FFELP loans. The form contains an application, promissory note, instructions for completing the form, a list of the types of loans that are eligible for consolidation and the Borrower’s Rights and Responsibilities. The student borrower works with his/her lender/servicer to complete the consolidation process.
Consolidation Loans Cannot be Unmade
Once made, Federal Consolidation Loans cannot be unmade. That’s because the loans that were consolidated have been paid off and no longer exist. Borrowers should take the time to study their options before making the decision to consolidate. A checklist has been designed to help a borrower determine whether and how loans should be consolidated.
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