Boston University Medical Campus
Student Financial Services

FEDERAL LOAN CONSOLIDATION

Federal loans may be consolidated through either the Federal Direct Loan Program (whereby funds are borrowed directly through the federal government without a private lender as intermediary) or through a private participating lender. In either case, the consolidation is considered a federal loan.

INTEREST RATES

The interest rates offered by each version of federal consolidation are identical, although there are some differences regarding the loans you may include. Consolidation loans issued on/after February 1, 1999 receive a weighted average of the rates on the loans being consolidated, rounded to the next higher 1/8 of 1%. This fixed rate cannot exceed 8.25%. (Loans issued prior to that date receive a variable rate capped at 8.25%.) Private lenders and the Federal Direct Loan Program have the option to offer interest rate discounts to borrowers who make a certain number of consecutive, on-time monthly payments or arrange to have payments electronically deducted from their checking account.

You may apply for consolidation to determine what rate the lender would charge; if the rate is higher than you would like to pay, you may decline the consolidation by not signing the promissory note. The interest rates of many of your current student loans are variable. Therefore, the timing of your application for consolidation could impact the fixed rate you are offered. Since future variable interest rates are unknown, it is often impossible to predict with certainty whether consolidation will save you money. However, sound judgment based on probability and your tolerance for risk are still possible.

Borrowers considering consolidation should weigh the relative advantages of:

1. keeping their current variable rate(s), capped at 8.25%, or
2. switching to a fixed rate as high as 8.25%.

Direct and Stafford loans issued in different years may have different rates, due to variances in the way their variable rates are calculated. Unless the weighted average of these rates reaches 8.25%, in which case there is no immediate financial advantage of consolidating, it is impossible to predict with absolute certainty which of the above two options would be cheaper.

IMPACT ON GRACE PERIOD AND DEFERMENT ELIGIBILITY

Federal consolidation refreshes your remaining deferment eligibilities to their original levels, even if you had used some or all of these deferments before consolidating. The timing of consolidation therefore has an impact on your overall deferment eligibility. For example, those who borrowed their first Stafford Loan prior to July of 1993 are eligible for a 2-year residency deferment. If a resident anticipating four years of training waits until the end of PGY-2 to consolidate, he or she could qualify for deferment though the entire residency program. If this same group of borrowers were to consolidate through the Federal Direct Loan Program, they would also become eligible for new deferment categories currently only accessible to newer borrowers. Deferment on Stafford or Direct Loans is valuable, since interest does not accrue on subsidized loans during these periods. Based on a subsidized Stafford/Direct Loan balance of $34,000, each year of deferment provides up to $2,800 in interest savings.

In considering the timing of consolidation, take into account how your eligibility for a post-graduation grace period and for deferments will be impacted, either positively or negatively. It is possible that consolidating too soon could jeopardize your ability to maximize the length of your deferment eligibility, and could cause you to lose your grace period.

SPECIAL TREATMENT OF HEAL

Health Education Assistance Loans may be included in a Federal Direct Consolidation. While HEAL rates are relatively low now, they have no cap and present some long-term risk. Private lenders may refuse to accept HEALs; even if they do accept them, they would charge a rate that is not competitive on that portion of the consolidated debt; therefore, it would be beneficial to apply for consolidation through the Direct Lending Program if you wish to include HEALs. If your HEAL rates are low, they could help to lower the fixed rate that would be charged on a Direct Consolidation. Conversely, if HEAL rates are high, they could raise your consolidation rate.

TREATMENT OF OTHER FEDERAL LOANS

Aside from Stafford/Direct and HEAL loans, you may also include Perkins, Health Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS). These loans charge only a 5% interest rate, and are subsidized during deferment periods. Including them in a consolidation would increase their rate, but could also decrease the overall consolidation rate if you have a substantial balance. You could ask the consolidating lender to run two scenarios for you-one with these loans, and one without. CAUTION: HPSL and LDS loans lose their interest subsidy when they are consolidated!

CHOOSING LOANS TO CONSOLIDATE

At the time of consolidation, you may be selective in choosing only certain federal loans to include, as long as there is at least one Stafford/Direct loan. If you choose to add other eligible loans later, your consolidation interest rate will be recalculated. To add loans 180+ days after the original consolidation, it is necessary to apply for a new Federal Consolidation Loan at whatever terms are being offered at that time. In other words, adding loans could impact the terms of the rest of your consolidated debt.

THE VALUE OF CONVENIENCE

You may be able to decrease the number of lenders to whom you are required to make payments by consolidating. However, it is not always necessary to consolidate to gain convenience. As an alternative, you may request that your preferred lender buy Stafford loans from your other lenders, and combine them. The loans would still remain separate entities, and their terms would not change. However, they could all be included on a single monthly billing statement. Combination is a way to gain convenience without changing the terms of your loans. Combination is not possible between Direct Stafford loans and Stafford loans borrowed through a private lender, or between Stafford/Direct and HEAL loans.

More detailed information about the federal consolidation program is available from the Loan Consolidation Center at (800) 557-7392 and from private lenders.

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