A student loan consolidation takes the borrowers loans and combines all the loans into one new loan with one lender, and one weighted average interest rate. This removes the burden from the borrower of trying to keep track of many different loans, with different lenders, balances, and interest rates. Consolidation programs exist for both federal and private student loans, but the purpose of this page is to discuss federal student loan consolidations. For more information of private student loans, click here.
William D Ford Direct Loan Consolidation Program
President George H.W Bush first passed the Direct Loan program in 1992, as an amendment under the Reauthorization of the Higher Education Act. Although the program existed since then, it was not until President Obama’s budget in 2010 switched all new student loan lending over to the Direct Loan program. This is part of the reason why many people refer to it as the Obama Student Loan Forgiveness program.
The Direct Loan program now has a $1 trillion dollar balance, with a yearly increase in the hundreds of billions of dollars being lent to students.
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Benefits of the Consolidation
There are quite a few good reasons to consider consolidating your federal student loans. Understanding all the benefits will help you make a good financial decision. Here is an overview of some of the many benefits:
- Having only one federal loan under your name, with one lender, and one interest rate will greatly simplify your student loans. You will be able to track this student loan balance on one monthly bill. No more paying many bills to many lenders, and not knowing the combined balance of all your loans on one single statement.
- Consolidation offers flexible repayment plans. You can enter into a payment plan that fits your needs, with payments even as low as $0.00 per month depending on your income and family size. This is not a deferment or forbearance, its an actual payment of $0.00 per month if your income is so low that the government says you cannot afford to make payments. Payment plans are also not written in stone as with a normal loan. If for example you are currently able to make your payments without a problem, but in the future lose part of your income, you will be able to change your repayment plan with no other adjustments to your loans being necessary. This offers the borrower to have flexibility with the monthly payment, and not fall into default when unemployed, or earning less than what he or she is able to pay the most necessities with.
- Consolidation also has various loan forgiveness aspects which may not be available with your current loans.
- After paying on your loans for 20-25 years, any remaining balance on your federal student loans is forgiven. This could be a very sizable amount.
- Interest in the IBR repayment plan is forgiven on the subsidized portion of your loans for the first three years if your monthly payment is less that the interest that should be accruing.
- Consolidated loans are eligible for the Public Service Loan Forgiveness program.
- Consolidation also takes any defaulted loans you have out of default and puts them into good standing with a fresh start. This gives the borrower a second chance, combined with the flexible repayment plans it makes falling back into default difficult unless the borrower is not pro-active with the loans, and takes an “I do not care” attitude towards them.
- Interest on the loan is exactly what your current interest is on all your loans. This means you do not have to worry about the interest rate, no negotiating, no hassle.
Reasons To Not Consolidate.
Consolidation may not be the best option for everyone. What is the most important is to become educated about your loans, what programs exist to help you, and then to take action on what you determine to be the best for your particular situation?
Here are some reasons you may want to consider not consolidating your loans:
- Consolidation will in some cases extend the life of your loan. If you can afford your payment and want to get the loan paid off as fast as possible, consolidation may not be for you.
- When your loans are consolidated, they are converted into Direct Loans. At that time, you will lose any benefits of your old loans, but gain the benefits of the Direct Loans.
There are several repayment plans the borrower can choose to take advantage of in the new consolidated loan. The Income Based Repayment and Pay As You Earn are often the most beneficial for those with financial difficulties.
Weighted Average Interest Rate
The Direct Loan Consolidation program uses a weighted average interest rate to calculate your new interest rate in the consolidation rounded up to the nearest one-eighth of 1%. This method takes the average weight(balance) of your loans as compared with the interest rate to give you a new fair interest rate.
|Example: Borrower has a balance of $100,000 on their federal student loans that is split into two different loans. One loan is $25,000 @ 6.5% interest, the second loan is $75,000 @ 3.5% interest. Because the loan with a $25k balance makes up 25% of the borrowers’ balance, they would multiple 25% x 6.5% = 1.625%. Next, the remaining $75k balance makes up 75% of the borrowers total balance, so they would multiple 75% x 3.5% = 2.625%. The Department of Education would then combined those two numbers to come up with the weighted average interest rate of 1.625% + 2.625% = 4.25%.|
As you can see from this example, the borrower had not one but two interest rates which have now been combined into one interest rate that takes the balance(s) of the loan into consideration when calculating the new and fair weighted average interest rate.
How Long Does It Take To Consolidate
The length of time required to complete the consolidation depends largely on the borrower and the federal servicer. Once the borrower has signed all the necessary paperwork and has submitted it to the lender, it typically takes between 30-60 days for the loans to be consolidated and paid off.
Loans That Are Eligible For Consolidation
Only federal student loans are eligible for this consolidation; private loans are excluded entirely. The loan types which qualify for a consolidation are:
Only federal student loans are eligible for this consolidation
- Direct Subsidized
- Direct Unsubsidized
- Federal Perkins Loans
- Plus Loans
- Stafford Unsubsidized
- Stafford Subsidized
- Supplemental Loans for Students(SLS)
- Federal Nursing Loans
- Health Education Assistance Loans
- FFEL Loans (must be consolidated with another loan, or applying for PSLF)
When Can I Apply For Consolidation?
Generally, you can apply for a consolidation once you have graduated from school, or have left school, or have dropped below 6 credits per semester. Your student loans would need to show that they are not in “FULL TIME” status, and must be in repayment. There is no cost to applying for a consolidation if you plan on applying on your own through the Department of Education. If on the other hand you need assistance and would like someone to assist you through the consolidation process, please call 844-669-4407.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.