A consolidation loan may help make payments more manageable by combining several federal student loans into one loan with one monthly payment. You need to apply for loan consolidation and choose a standard, an extended, a graduated, an income-contingent (for Direct Consolidation Loans), an income-sensitive (for FFEL Consolidation Loans), or an income-based repayment plan. Depending on the amount of your debt, standard and graduated repayment plans have 10- to 30-year repayment periods.
The interest rate for both Direct and FFEL Consolidation Loans is a fixed rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on all of the loans you consolidate, rounded up to the nearest one-eighth of 1 percent. However, the interest rate will never exceed 8.25 percent.
Loan consolidation can offer you benefits to help manage your education debt. You can:
- Make lower monthly payments by increasing the repayment period (However, this will increase the total amount you repay over the life of your loan).
- Make a single monthly loan payment on one bill to one lender.
As with other loan types, you may prepay a consolidation loan without penality and may change repayment plans if you find that your current plan no longer meets your needs.
Although consolidation can help many students manage their monthly payments, there are some cases when consolidation may not be right for you.
- You may lose certain benefits (such as cancellation benefits, interest subsidies, etc.) that were offered on the loans being consolidated. Borrower benefit programs may vary among different consolidation lenders.
- If you are close to paying off your student loans, it may not make sense to consolidate. By extending the years of repayment for your loans, you may be increasing the total amount you have to pay in interest.
- Discuss your options with the financial aid office at your school.