LOAN CONSOLIDATION

LOAN CONSOLIDATION OPTIONS

Loan consolidation is designed to make repaying your loans more convenient and may reduce the size of your monthly payments. A lender issues a consolidation loan for the combined amount of the outstanding principal and accrued interest of all loans that are to be consolidated; it then pays off the original loans in full. It is important to understand, however, that consolidating your loans may increase the total cost of borrowing. When considering consolidation, consult with more than one lender to determine its real cost and advantages as compared with maintaining separate loans. It may be helpful to ask the following questions:

How would consolidation affect my grace period and/or deferment options?
How would the interest rate on a consolidation loan compare with the individual interest rates on my separate loans?
Will I lose or gain interest rate caps?
How does the interest capitalization policy on a consolidation loan compare with that of my original loans?
Are there repayment options available under consolidation that are valuable to me and that are not available otherwise?
Will smaller payments and/or the convenience of repaying fewer loans reduce the chances that I will become delinquent or default on my student loans?

While there are no application or origination fees to consolidate, there is a possible hidden fee. Upon consolidation, accrued and unpaid interest is capitalized (added to the principal balance). Thus, future interest charges are based on a higher principal balance; in essence, interest is charged on your interest. This always happens just before entering repayment if you have postponed paying interest during your training; however, consolidating early would cause an additional capitalization, the cost of which could outweigh the savings from a reduced interest rate. Generally, it is advisable to wait to consolidate until a few months before repayment will begin, unless:

You want to lock in a very low interest rate that may not be available in the future (since the rates on your variable loans will change);

You need the convenience of having fewer lenders to correspond with during your training;

You don’t want to take the risk that the terms of federal consolidation could change for the worse between now and when you are finally ready to consolidate

and/or

You wish to consolidate at a specific time to maximize your deferment eligibility.

A federal loan on which a borrower has defaulted is eligible to be consolidated only if the borrower has, prior to the time of application, made satisfactory repayment arrangements with the holder of the loan and provides evidence of those arrangements to the consolidating lender. The borrower must have made at least three and up to six consecutive ‘reasonable and affordable’ monthly payments on the defaulted loan.

Due to changes in federal legislation, married couples can no longer consolidate their federal loans together.

Different consolidation options are available to borrowers depending on which types of loans they have established. For this reason, we have set up separate sections on our website for Federal Loan Consolidation, Direct Loan Consolidation, and FFELP Consolidation.

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