United States Laws of Student Loans

As you go through the student loan consolidation process, you will discover that federal and private student loans cannot be combined together. They cannot be combined because they operate under completely different laws and regulations.

Federal Student Loan Laws:

Federal student loans are subject to strict federal regulations. The government determines how much money will be disbursed (with capped limits), the fees charged (usually none), the interest rate (fixed), and the term (10 years). You cannot shop around hoping to find a Stafford loan with a better fixed interest rate. The government sets a rate, and you can take it or leave it.

The Federal Loan Consolidation Program, established in 1986, sets the laws that lenders must follow when consolidating federal loans. It is important that you familiarize yourself with these laws to protect yourself from unscrupulous lenders. Here’s a look at what every borrower needs to know:

  • What and When to Consolidate – The law states that you are eligible to consolidate your federal loans if you have at least one Federal Family Education Loan or Direct Loan. The loans can be in repayment, grace, default, or deferment status. If the loan is in default, you must agree with your lender, prior to consolidating, to once again begin making satisfactory payments. Consolidating can begin once you have graduated or withdrawn from school. There is also a provision that allows you to consolidate if you are attending school less than part time.
  • Interest Rates – When you consolidate, lenders set a new fixed interest rate that is applied to your remaining federal loan balance. The new rate will be a blended average of your current rates, rounded up by 0.125%. However, the law states a lender cannot charge a fixed interest rate that is greater than 8.25%.
  • Terms – A federal student loan will often have a standard term of 10 years. The law states that, by consolidating, you can extend the term out to 30 years. However, lenders will have some leeway in determining how long your loan can be extended. If you have $8,000 in federal loans, do not go into this process expecting to have 20 more years to pay that money back.
  • Fees – Federal regulations state that application fees cannot be charged when you consolidate federal loans. This means there is no up-front cost to you. However, some companies may charge origination fees or service fees to make up for this lost revenue. The Higher Education Act prohibits lenders from charging prepayment penalties if you decide to payback your consolidated federal loans early.

Private Student Loan Laws:

Private lenders have the ability to determine the amount of money to lend, the interest rates they want to charge, the term of the loan, and incentives they want to offer. If you don’t like what one lender offers, you can shop around and find a loan that matches your financial needs. Competition drives the private loan market, giving borrowers more options. Standard federal lending laws and regulations apply to these private loans. However, the government does not set the interest rates or the fees these lenders charge