Checklist Tool for Consolidation

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 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 (FDLP).

In general, consolidation loans issued under the FFELP and the FDLP carry the same terms and conditions.

• Interest rate. The interest rate for both FFELP and FDLP consolidations is set according a formula established by federal statute. The rate is the weighted-average rate of the current rates charged on the loans being consolidated, rounded up to the nearest 1/8th of a percent. This means that the consolidation rate cannot be more than 1/8th of a percent more than the effective rate on the individual loans. The consolidation rate is fixed for the life of the loan, which protects borrowers from future increases in variable rate loans but prevents them from benefiting from future decreases in variable rates.
  
  Borrowers with Stafford loans issued on or after July 1, 1995, can reduce the consolidation rate by up to half a percentage point or more by consolidating before the end of grace. That's because variable interest rate formulas for these Stafford loans is the in-grace rate 0.6% below the rate paid during repayment.
  
  Notes: In general, lenders base consolidation interest rate calculations on the variable rate set according to federal rate formulas, exclusive of interest rate discounts provided under various borrower benefit programs. Also, any HEAL loans included in a consolidation loan remain subject to a variable rate, also set according to a federal formula.
  
  
• Repayment period. The payback term ranges from 10 to 30 years, depending on the amount of education debt being repaid and the repayment option selected by the borrower. Education loans not included in the consolidation loan are considered in determining the maximum payback period. Borrowers may elect to repay their loans under a shorter period than the maximum allowed.
  
  
• Repayment options. The FFELP and FDLP offer three basic repayment options for consolidation loans: level-repayment (equal-installment), graduated repayment, and income-based payment plans. Graduated repayment schedules may vary from lender to lender; however, payments must be sufficient to cover accruing interest and no payment can be more than three times any other payment. Under the direct loan program, income-based repayment is available only to Stafford borrowers via the income contingent repayment plan (ICRP). FFELP Consolidation offers an income-sensitive repayment plan to both Stafford and PLUS borrowers.
  
  
• Eligibility rules. Virtually all federal education borrowers are eligible to consolidate their loans. All Stafford borrowers are eligible to consolidate after they graduate, leave school, or drop below half-time enrollment. The FDLP consolidation allows in-school consolidation; however, in-school consolidation is subject to a number of restrictions. PLUS loans are eligible for consolidation once they are fully disbursed. Borrowers who are delinquent or in default must meet certain requirements before they may consolidate their loans.
  
  
• Fees. Borrowers who consolidate will not pay any application fees or prepayment penalties.
  
  
• Credit checks. Under FFELP consolidation loans, no credit checks are required, even for PLUS borrowers. Under the FDLP consolidation program, PLUS borrowers are subject to a check for adverse credit history.

Always consider the cost. Borrowers should keep in mind that consolidation can significantly increase the total cost of repaying their loans. Consolidation offers lower monthly payments by giving borrowers up to 20 years longer to repay their loans. Thus, borrowers will make more payments and thus pay more in interest. In fact, consolidation can double total interest expense. Borrowers, especially those who do not need monthly payment relief, should compare the cost of repaying their unconsolidated loans against the cost of repaying a consolidation loan. Borrowers also should take into account the impact of losing any borrower benefits offered under non-consolidated repayment plans. Borrower benefits, which may include interest rate discounts or principal rebates, can significantly reduce the cost of repaying your loans.

Once made, Federal Consolidation Loans cannot be unmade. That's because the loans that were consolidated have been paid off and no longer exist. Thus, borrowers should take the time to study their consolidation options before they submit their applications. The following checklist has been designed to help borrowers determine whether and how they should consolidate their loans under a Federal Consolidation Loan.

Consolidation Checklist

The very first step: Take inventory of your student loans.

For information on your student loans, review your loan documents, contact your lender or loan servicer. If your are uncertain of current lenders or loan servicers, visit the Web site of the National Student Clearinghouse and use the LoanLocator (SM) service to identify the location of your education loans. There is no charge for this service.

Loan Type: Subsidized Stafford, Unsubsidized Stafford, SLS, Perkins, Federal Nursing Loans, Health Education Assistance Loans, other federal education loans

Status: In-School; Grace; Repayment; Deferment; Forbearance. Note length of time before end of grace or deferment period, etc.

Monthly Payment Amount: If not in repayment status yet, estimate monthly payment based on current interest rate and balance. You can get payment amounts by calling lender or loan servicer or visiting Web site repayment calculators.

Eligibility for Borrower Benefits: Make note of any borrower benefits currently available or potentially available for your loans.

Eligibility for Consolidation Loans: Most federal education loans are eligible for consolidation. Private education loans are not eligible.

Next Steps:

1. Determine total monthly payment for unconsolidated loans.
   
   
2. Use worksheet to determine whether monthly payment exceeds percentage of income to be allocated to student loan payment. This percentage should be based on realistic budget.
   - If payment exceeds monthly allocation, re-evaluate budget and assess income situation.
   
   
3. Consider deferment or forbearance option for short-term payment relief needs.
   
   
4. If debt relief needs are long term, consider consolidation.
   
   
5. Select loans for consolidation.
   
   
6. Determine monthly payment and total interest costs for consolidation loan and compare to cost of repaying loans without consolidation.
   • For help in calculating monthly payments, contact your lender or loan servicer or use one of the Web resource calculators that accompanies this checklist.
     
     
7. Assess future education plans. Are you planning return to school (at least half-time) in near future?
   • If answer is yes, exclude Perkins, other subsidized nonStafford federal education loans.
   • If answer is no, include these loans.
     
     
8. Consider impact of consolidation on future deferment options.
   • This is important issue for medical school students.
   • If uncertain about deferment impact, call lender or loan servicer.
     
     
9. Consider impact on loan forgiveness programs.
• Perkins loans will lose eligibility for federal loan forgiveness programs.
  
  
10. Contact lender to begin consolidation process.
• If only one Stafford lender, contact that lender.
  
  
11. If eligible for in-school consolidation and planning to consolidate while in-school, make sure to apply prior to your graduation date.
    
    
12. If still in grace, consider consolidating before the end of grace to begin consolidation at least two months before end of grace. Can lock-in Stafford interest rate based on grace rate-currently .6 percent lower than repayment rate. By consolidating in grace, you will give up remaining portion of grace period.
    
    
13. If consolidating in grace, submit your application at least two months before the end of grace. Some lenders offer to hold disbursement of consolidation loans until the end of grace to enable borrowers to minimize their interest rate and maximize their grace period.
    
    
14. Make sure to complete consolidation application.
    • Provide complete address information, include two references, and sign promissory note.
    • Complete applications are easier and faster to process.
      
      
15. If already in repayment, continue making payments on loans you are consolidating until consolidation is completed.
    • If you need immediate payment relief, request deferment or forbearance.
    • Repayment of consolidation loans begins within 60 days of the disbursement of the consolidation loan.
      
      
16. If you have questions about consolidation, do not hesitate to contact your lender or loan servicer. Check your loan documents for the toll-free customer assistance number.

Consolidation Tips

• The rules governing where borrowers can consolidate are a bit complicated. Under current federal rules:
  • An eligible borrower whose FFELP loans are held by one lender or loan holder must first request consolidation from that FFELP lender/loan holder.
  • An eligible borrower who has multiple FFELP lenders or loan holders is not required to select a lender/loan holder that currently holds of one of the loans.
  • Borrowers with one or more direct loans may consolidate under the direct loan Consolidation Program.
  • Borrowers with one more direct loans, including consolidation loans, are eligible to consolidate under a FFELP consolidation loan.
  • A borrower may consolidate FFELP loans under the direct loan consolidation program if the borrower certifies that one of the following conditions is true:
    1. The borrower has at least one direct loan.
    2. The borrower does not have a direct loan but is attending a Direct Lending school and is requesting an in-school consolidation.
    3. The borrower has only FFELP loans but cannot obtain a consolidation loan from a FFELP lender.
    4. The borrower has only FFELP loans, can obtain a consolidation loan from a FFELP lender, and has requested income-sensitive terms from that lender but found the income-sensitive repayment terms offered to be unacceptable. Note: Under this rule, the borrower must be eligible for the income contingent repayment plan offered under the FDLP. Thus, only Stafford borrowers may qualify under this rule, because PLUS borrowers are not eligible for the income contingent repayment option.
       
       
• Make sure to sort out how consolidation can affect deferment and grace period benefits. Borrowers who consolidate in grace will lose any grace period that would otherwise remain after the disbursement date. Borrowers seeking in-school consolidation under the FDLP will keep their post-school grace period for the consolidated loans; this grace period will also apply to loans that had previously entered repayment and are currently placed in an educational deferment status. Deferment issues can vary from borrower to borrower, so make sure to call your lender or loan servicer if you have any questions.
  
  
• In general, borrowers should always pay off their highest-rate debt first. Thus, it may make good financial sense for borrowers to consolidate their low-rate federal education loans and use the extra monthly discretionary income generated by the lower student loan payment to repay high-rate credit card debts.
  
  
• Consolidation loans are deemed eligible loans for the federal interest deduction for education loans. The ability to take this deduction is subject to a number of federal rules, including an income test. However, Congress recently eased these restrictions. Beginning with tax year 2002, borrowers may deduct interest paid beyond the first 60 months of repayment; borrowers will also be subject to higher income limits. For details or assistance in determining eligibility, borrowers should contact a qualified tax adviser or the Internal Revenue Service. A good place to start is the IRS Web site.
  
  
• Married couples are allowed to consolidate their loans under a single spousal consolidation loans. However, borrowers are generally advised NOT to consolidate their loans under a spousal loan. This is because, the husband and wife become jointly and severally liable for repaying the entire consolidation balance, even in the event of divorce or the death or total and permanent disability of a spouse.
  

Return to Previous