Loan Consolidation

What is Loan Consolidation?

Consolidation student loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balance on the other loans. The borrower is left with just one monthly payment to make to one lender. This payment is usually quite a bit smaller than the combination of payments the borrower was making.

This can make a lot of sense. According to a recent study, the majority of four year college graduates are carrying close to $20,000 in student loan debt. Graduate students, medical students and law students have much more. This debt is usually in the form of multiple loans from various lenders. Consolidation affords students and graduates the opportunity to more successfully manage their debt obligations.

On the other hand, loan consolidation can significantly increase the total cost of repaying your loans. Consolidation offers lower monthly payments by giving you up to 30 years to repay your loans. If you increase the length of your repayment period, you’ll also make more payments and pay more in interest than you would otherwise. In some situations, consolidation can double your total interest expense. If you don’t need monthly payment relief, you should compare the cost of repaying your unconsolidated loans against the cost of repaying a consolidation loan. You will find the tools to make this evaluation at

You also should take into account the impact of losing any borrower benefits offered under repayment plans for the original loans. Borrower benefits from your original loan, which may include interest rate discounts, principal rebates, or some loan cancellation benefits, can significantly reduce the cost of repaying your loans. You may lose those benefits if you consolidate.


When to Consider Consolidation

If you find yourself in any of these situations a consolidation loan might be right for you:

  •  You have multiple federal and/or private student loans
  • You have been delinquent on any monthly student loan payments
  • You foresee large financial obligations that could put your monthly payments at risk.

Talk to your lender about the specifics of their consolidation loans. Lenders would rather write you a new loan to consolidate your debts than have you be delinquent on your old loan.


Consolidating Federal Loans

Students who have received a Stafford or Perkins Loan or parents who have received a Parents PLUS loan are eligible for the Federal Consolidation Loan after they have graduated from college. These loans allow students to combine existing loans into one manageable loan with a single payment schedule. Benefits of federal loan consolidation include:

  • Interest rates are fixed
  • Monthly payments are made more manageable
  • Repayment period can be extended from 10 to 30 months
  • Protects your credit rating.

A Federal Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. However, the rate will not exceed 8.25%.


Private Student Loan Consolidation

Students who have private lender loans can also take advantage of loan consolidation programs. Many private lenders offer attractive loan packages to make it easier for students to pay off their loans and avoid default. As these loans are underwritten by Although private lenders consolidation loans have higher interest rates and stricter time limits than Federal loans, they are still a good way to reduce your monthly obligations to one manageable payments.

Private consolidation loans are credit-based, as are all private loans. You may need a co-signor to qualify for a consolidation loan and you will have to be able to prove a regular income that meets the lenders requirements.

If you have both private lender loans and Federal student loans, you cannot consolidate both into one new loan. You will have to negotiate one consolidation loan for your private lender loans and one for your Federal loans.


Applying for Student Loan Consolidation

The application process for student loan consolidation will depend on what type of loans you need to consolidate.

  • If you have Federal Direct Loans you can apply for a Direct Consolidation Loan through the U.S. Department of Education at
  • If you have a loan under the old Federal Family Education Loans program (FFEL), you must apply to your primary lender for the FFEL Consolidation Loan program.
  • Private student loans must be consolidation through the original lender or through another private lender who is prepared to underwrite your consolidation loan. Remember, private consolidation loans are credit-based and there is no guarantee that all students carrying student debt will qualify.