Question: How does loan consolidation work?

Answer: When you consolidate your student loans, your original debts are paid off and you roll the combined balances from your previous loans into one new, larger loan with a fixed interest rate.

Question: What are the main benefits of loan consolidation?

Answer: It’s easier to make one payment to a single lender. Your can lower your payments significantly by stretching out your repayment period. There are no fees, credit checks, or prepayment penalties. And the fixed interest rate is set by federal law, with a lifetime cap of 8.25 percent.

Question: What are the main drawbacks to consolidating student loans?

Answer: Increasing the payment length results in substantially more interest charges over the life of the loan. You may lose cancellation, forgiveness, deferment, forbearance, grace-period, and other privileges on some loans. And once you consolidate your loans, your decision is permanent. You can’t undo a loan consolidation. You can, however, re-consolidate a consolidated loan, so long as you are including a new loan to the consolidation.

Question: How low will my monthly payments go if I consolidate my loan(s)?

Answer: It varies. But according to many student loan companies,  consolidating your student loans may reduce your monthly payments by as much as 50 percent. Just remember: upfront savings in the short-run translate into additional finance charges in the long-run due to longer repayment periods.

Question: What will my interest rate be?

Answer: That depends on the interest rates you’re presently paying on your student loans. The new interest rate on your consolidated loan will be a weighted average of all the interest rates you currently have, rounded up to the next nearest one-eighth of 1 percent. Under the law, federal consolidated loans also have a lifetime interest rate cap of 8.25 percent.

Question: Are there fees associated with federal loan consolidation?

Answer: No. Consolidation is free. There are no application fees and no prepayment penalties.

Question: Where can I get a consolidated loan?

Answer: To apply for an FFEL (Family Funded Education Loan)  consolidation or a direct loan consolidation, contact the bank, lender, or credit union of your choosing via telephone or over the Web. Alternatively, if you don’t have an FFEL lender in mind, call 1-800-433-3243 for help. Additionally, you can contact the Direct Loan Origination Center’s Consolidation Department at 1-800-557-7392 or visit: www.loanconsolidation.ed.gov.

When you call to discuss your loan consolidation options, remember that private education loans are not eligible. And consolidation isn’t just for students. PLUS loan borrowers (parent borrowers) can also consolidate their loans, provided the PLUS loans have been fully disbursed.

Question: How can I get the best deal on a consolidated loan?

Answer: Since interest rates on federal consolidated loans are the same at every lender, getting the best deal boils down to choosing a lender with good service and one that offers a host of perks, such as interest-rate reductions after you’ve paid your loans on time for a fixed periods, such as 12 or 24 months. Some lenders also lower your rate if you agree to pay by automatic debit.

Question: What happens when I consolidate my loans during the grace period?

Answer: Some grads choose to consolidate their loans during their grace period in order to receive the grace rate on their loans, which is .60 percent below the rate you’ll pay once you begin repaying your loans. In consolidating during the grace period, however, you automatically waive the remainder of your grace period and your loan payments are immediately due.

Maximize Your Grace Period—and Get the Lowest Consolidation Rate

If you want to consolidate your loans as soon as you graduate, it’s possible to snag the lower grace period interest rate and still enjoy your full six-month grace period without making any payments.

The way to do this is to carefully fill out the federal consolidation loan application. On it, you’ll find Section D, which contains a question that allows you to enter your grace period end date. If you write down a date on this section, your lender can’t complete processing of your application or disburse your loan until that date.

As a result, you can apply for a consolidation loan at any point during your grace period, get the lower grace period interest rate, and still put off making payments until your six-month grace period ends.

Question: Is there a maximum or minimum loan limit for a federally consolidated loan?

Answer: No. There are no dollar limits on the amount of student loans you can consolidate.

Question: If I’ve consolidated my loans already, can I get a new consolidation loan?

Answer: Yes, under certain conditions. You can include existing consolidation loans in new direct consolidation loans if you include at least one other FFEL loan or direct loan into your existing direct consolidation loan or your existing FFEL consolidation loan, or if you’re attempting to consolidate an FFEL consolidation loan that’s been submitted to a guaranty agency for default aversion by your loan holder.

Question: How long does it take for a loan consolidation to be processed?

Answer: That depends on your lender, as well as the number and types of loans you presently have. But as a rough guide, plan on the process taking as much as six to eight weeks. Your first payment will then be due within 45 days after the consolidation is finished.

Question: What is the difference between the FFEL program and the direct consolidation loan program?

Answer: The FFEL program involves bank-based loans and the direct consolidation loans are made through the Department of Education. According to the Department of Education’s Web site, some differences between the programs may include:

• Minimum balances or numbers of loans required to apply
• Types of loans that can be consolidated
• A prior account relationship may be required
• Repayment incentive benefits to encourage good repayment behavior
• The convenience of electronic debit, ensuring that monthly payments are made on time
• Repayment plans offered, such as payments sensitive to a borrower’s income, family size, and total education indebtedness

If your credit is shaky, you might have to go with a loan consolidation through the FFEL program. That’s because with FFEL consolidation loans, no credit check is required, even for PLUS borrowers, who are typically parents of students in college. With direct loan consolidation, however, PLUS borrowers will be subjected to a credit check to make sure they don’t have a negative credit history.

Before you settle on a loan consolidation program, use an online calculator or two that can tell you how much your consolidated loan will cost you in the long-run.

In the end, your best bet at getting a consolidation loan that fits your needs is to do your homework, and learn as much as possible from potential lenders about how your loan will be handled and what features or special benefits a prospective lender offers. It’s only by becoming a savvy consumer, and making informed choices, that you’ll wind up with student loans—whether consolidated or not—that you can live with comfortably.

Reader Question:

Q: Hi. I just paid my school loan in full by the due date. However, I just received a bill for additional interest. Am I obligated to pay it?

A: You likely received a bill — even after you paid your student loan in full — because your lender was probably charging you per diem interest, also known as “interim interest.” This is done primarily with mortgages, but other lenders can charge per diem interest too.
Basically, it refers to the interest charged on a loan for the day or days between the time the loan closes (or is paid off, in your case) and the end of the month.

So even though it’s a pain to get this bill after the fact, if your lender was charging you per diem interest, it is a legitimate charge and I would just go ahead and pay it.