Federal Loan Consolidation

Federal student loans are one of the more popular ways students and their parents finance educational expenses. Unlike private loans, many of these loans are subsidized. Interest rates are fixed and typically lower than private loans. Plus, federal loans offer a grace period of up to 9 months before you need to start repaying the money. These loans can also be partially forgiven if you become a public service employee or a civil legal assistance attorney.

A federal loan does not operate under the same terms, conditions, or interest rates as a private loan does, so your federal student loans will need to be consolidated separately. You will not be able to reap the benefit of a fixed interest rate when you consolidate these loans. That benefit is reserved for consolidating your private loans that have variable interest rates. Federal loans already have fixed interest rates. However, you will be able to negotiate a lower monthly payment, have the same fixed interest rate for all your federal loans, and receive just one bill each month.

Why Consolidate?

Most standard federal student loans have a term of 10 years. Once you graduate or withdraw, these loans have a grace period between two and nine months before you are required to start making payments. This grace period does help recent graduates get their finances in order as they begin their new career. However, once they start paying back these loans, they might discover that the monthly payment is more than they can handle financially.

Consolidating your federal loans helps you buy more time to pay the money back. In fact, the student loan consolidation process can extend the life of your federal loan up to 30 years. As you extend the life of your loan, your monthly payments become much smaller. In some cases, you may be able to cut your monthly payment in half! However, these lower payments do come at a cost. Each payment you make will include a certain amount of interest, so the more payments you make, the more interest you end up paying.

At some point, you may have the ability to pay the loan back earlier than you anticipated. You do not need to worry about any penalties for early payment. The Higher Education Act states that prepayment fees cannot be charged if you decide to pay back your federal student loans early.

What Are the Requirements?

The following unsubsidized and subsidized loans are eligible for consolidation: PLUS, Stafford, Federal Perkins, Health Education Assistance, Federal Nursing, and Supplemental Loans for Students. If you are a student, you are only allowed to consolidate loans taken out in your name. Your parents may have taken out a PLUS loan to help out with your educational expenses. They will not be able to transfer this loan over to you for consolidation, but must initiate their own consolidation process.

Here is a quick look at the eligibility requirements you need to meet in order to consolidate these loans:

  1. The loan must be completely disbursed. An exception is given if you are attending school less than part time.
  2. You need to have at least one Federal Family Education Loan or Direct Loan.
  3. The loan needs to be in default, deferment, repayment, or grace status.

Typically, you have just one opportunity to consolidate your Direct Loans. If for some reason you have received an additional Direct or Federal Family Loan, you may have the opportunity to consolidate one more time. Regardless, this is an extremely important financial decision that you will end up making. Review each of your loans carefully, and make sure the lower monthly payment is worth the added interest expense.

Many banks have gotten out of the business of consolidating federal loans due to the new Student Loan Bill signed in 2010. However, there are many student loan consolidation companies that specialize in consolidating these loans. Due to federal regulations, these companies are not allowed to charge you application fees to consolidate these loans.