Federal Student Loan Consolidation
The federal government regulates the federal student loan consolidation process. The government ensures that each of their borrowers receives the same treatment, regardless of the size and scope of their federal loans. Remember, your private loans are not subject to these regulations. This is the main reason why lenders have you consolidate your private and federal loans separately.
Federal Loans You Can Consolidate
You will be able to consolidate most of your subsidized and unsubsidized federal student loans. Stafford, PLUS, Health Education Assistance, Perkins, Supplemental, and Federal Nursing Loans are all eligible. If your parents took out a PLUS loan, they will not be able to transfer the loan to you for consolidation. You will only be able to consolidate federal loans that you took out.
Once you consolidate your federal loans, you cannot go back and unbundle certain loans. You will have to live with the terms of your new agreement. However, if you received an additional federal loan, or forgot to include one of your loans during the process, you may be able to add that to your current consolidation package.
Consolidating may not be the best option for some of your loans. You may have special grace periods or loan-forgiveness provisions which delay payment or even forgive a portion of your loan. When you consolidate, you may lose these beneficial provisions. Review your loan documents, and speak with the consolidation company to better understand the impact of what you might be losing.
What Borrowers Can Expect
In 1986, the Federal Loan Consolidation Program was formed. The program created a set of standards and regulations that federal student loan consolidation companies must comply with. Here is a look at the rules these companies must follow:
- Loan Terms – Federal loans carry a standard term of 10 years. Consolidating can give you up to 30 years to repay the money, but that does not mean your loan will automatically be extended. Companies will look at your loan balances and your financial situation to determine your new term. Often, you will need to have at least $7,500 in outstanding federal loans to qualify for a term extension.
- Interest Rates – Since 2006, all federal student loans have fixed interest rates. These rates are generally low to begin with. However, you may end up with an even lower rate when consolidating. It will all depend on the type of loan you had and when you took the loan out. The government sets a maximum interest rate that can be charged on federal loans. Currently, the consolidated fixed interest rate is 8.25%. Congress periodically reviews the rate to make sure it is consistent with the current economic climate.
- Fees/Penalties – Federal law prohibits consolidation companies from charging an application fee and a prepayment penalty. An application fee is an up-front fee companies once charged to process your consolidation application. Prepayment penalties were once common if you decided to pay off your student loans early. Read the fine print before you sign the promissory note to make sure that these fees and penalties have not just been renamed.
- Conditions – You will not be able to consolidate your federal loans when you are in school. Your federal loans will need to be in a grace period, repayment, or deferment status. The government does provide generous concessions to those in default. If you work out an arrangement with your lender to make satisfactory payments, you will be able to consolidate your defaulted loans.
- Grace Period – Many federal loans have grace periods, where interest may not be charged and repayment is not required. When you consolidate, the government states that these benefits can be stripped.
- Loan Forgiveness – The federal government advocates entering certain professions through its loan-forgiveness programs. Depending on the type of loan, you can have a portion of it forgiven if you are employed as a full-time teacher or in public service. The government does not guarantee you keep these loan-forgiveness benefits if you consolidate. This is especially true if you carry a Federal Perkins Loan.
You are not required to consolidate your federal loans directly through the government. There are a variety of student loan consolidation companies that you can use; each one must follow the government’s regulations, but they are able to offer different incentives or rebates to gain customers. It is important to research a few of these companies to make sure that you are getting the best deal for your unique financial situation.