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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 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.
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
Payment* |
Total
Payments |
Maximum
Loan
Consolidation
Term |
New
Monthly
Payment
(@8%) |
Total
Payments |
|
$10,000 |
$123 |
$14,700 |
15 Years |
$96 |
$17,130 |
|
$20,000 |
$245 |
$29,457 |
20 Years |
$167 |
$40,250 |
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).
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.
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.
Lender Participation
To participate in the Federal Consolidation Loan Program, a lender must meet the following requirements:
- the lender must be an eligible lender under FFELP (secondary markets may also be considered eligible lenders);
- the lender must sign an agreement to guarantee Federal Consolidation loans with a guarantor (this agreement may be separate agreement or included as part of other agreements between the lender and the guarantor); and
- the lender must maintain a certificate of comprehensive insurance coverage with the guarantor providing such coverage.
Lenders should contact individual guarantors for information on whether Consolidation loan agreements are separate from other lender agreements. The agreement to guarantee Federal Consolidation loans defines the terms and conditions under which the lender may make guaranteed Consolidation loans. This agreement is similar to the agreement that the lender must sign to participate in other loan programs with the guarantor.
The lender must meet specific requirements in the agreement for Consolidation loan guarantees to remain in effect. By signing the agreement, the lender agrees to meet the following requirements:
- to exercise reasonable care and diligence in the making, servicing, and collecting of consolidation loans;
- to comply with all applicable federal and state laws and regulations, as well as procedures required in federal regulations;
- to use an approved consolidation loan application and promissory note;
- to secure information on the outstanding balance of each eligible loan to be consolidated before including it in the consolidation loan;
- to pay the full proceeds of each outstanding loan to the appropriate holder;
- to pay the 0.5% origination fee to ED on each consolidation loan made;
- to promptly provide reports on other information that may be requested by the guarantor;
- to pay ED a monthly rebate fee on consolidation loans made on or after October 1, 1993, and held by the lender at month end; and
- to make consolidation loans without discriminating against an applicant.
For more detailed information on the consolidation process, refer to the Common Manual.
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