Published: Mar 10, 2009

 Education       Grad School       
By now, you've heard the shouts of lenders, all tempting you to consolidate your federal student loans. But just what is consolidation? And how do you know if it's the right choice for you?

When you consolidate your federal student loans, you are actually borrowing a brand-new loan, with its own interest rate and repayment terms. This new loan, the Federal Consolidation Loan, pays off any eligible federal student loans you choose to include. You then begin repaying this new loan.

Why all the fuss about consolidation?

Federal loan consolidation can offer you benefits such as lower monthly payments, fixed interest rates, and a single monthly payment for all your federal loans. All of these options can be enticing as your student loans near repayment. But before you run off and sign your loans away, arm yourself with a good understanding of federal loan consolidation.

Below are some of the most common Federal Consolidation facts and fallacies. If you have additional questions about consolidation, visit FederalConsolidation.Org, an Access Group Web site dedicated to educating borrowers about Federal Consolidation Loans.

Facts and Fallacies: The Truth about Federal Loan Consolidation

Fallacy: Consolidating your eligible federal student loans saves you money.

Fact: This one is a bit tricky. You typically can extend the length of repayment on your federal student loan debt when you borrow a Federal Consolidation Loan. Anytime you lengthen the repayment term on a loan at a given interest rate, the monthly payment decreases, but the total amount of interest paid increases if you utilize the full extended term. This does not save you money long term; it just reduces what you must pay each month.

The tricky aspect of this issue has to do with the interest rate. The fixed interest rate on Federal Consolidation Loans is the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of one percent. Federal Stafford Loans have a variable rate that is adjusted once each year on July 1st (capped at a maximum of 8.25%). If you consolidate your Federal Stafford Loans when their interest rates are at lower than average rates, then you can save some, and sometimes considerable, interest expense over the life of repayment due to the lower than average fixed rate you will receive on your consolidation loan. This will be particularly true if you repay the consolidation loan at a lower than average fixed interest rate over the same repayment term (typically 10 years) that you had on the Federal Stafford Loans you consolidated, and don't utilize the extended term.


Fallacy: You must apply by a certain deadline.

Fact: There are no deadlines in the Federal Consolidation Loan program. You can apply for the loan anytime during your grace period or during repayment (including during approved deferment and forbearance periods). There are several things to keep in mind, however, regarding when to consolidate.

If you consolidate when your Federal Stafford and/or Federal Direct Loans are still in their grace period or during an approved deferment period, their lower "in-school" interest rate will be used to calculate the weighted average fixed rate for the consolidation loan.

If you don't consolidate until after your Federal Stafford Loans have entered repayment, their interest rate will have increased to the "out-of-school" rate (currently 0.6% higher than the in-school rate) and that higher rate will be used to calculate the new interest rate on your consolidation loan.

Another factor that can impact when you should consolidate Federal Stafford Loans relates to when their variable interest rate changes. The rates on Federal Stafford Loans are adjusted annually on July 1st with the new rate information available around June 1st. If the rate is scheduled to increase on July 1st, you could take advantage of the lower prevailing rate by submitting your consolidation application prior to July 1st. Conversely, if the rate will be decreasing, you'd want to wait to submit your application until the lower rate takes effect. (In the weeks just prior to July 1, many lenders will hold your application for processing until that date, if the rate is scheduled to drop.) So, although July 1st is not a deadline, it is important in determining the interest rate that will be used in calculating the rate on your consolidation loan.


Fallacy: You will lose the grace period on your Federal Stafford Loans if you consolidate them.

Fact: This does not have to happen. The grace period is the time between the end of your enrollment as a student (on at least a half-time basis) and the point when loan repayment begins. Federal Stafford Loans currently have a six-month grace period. There is no grace period on a Federal Consolidation Loan so it enters immediate repayment and payments begin within 60 days after the loan is made. (Please note: Eligible Federal Consolidation Loan borrowers returning to school at least half-time may be able to defer their consolidation loan payments while in school. Visit FederalConsolidation.Org for more information about deferments.)

You can request that processing of your consolidation loan application be delayed, however, until the end of the grace period on the loans you are consolidating. To do so, you must enter the grace period end date in Section D of the consolidation application. (Contact the current loan holder/servicer if you do not know your grace period end date). If a date is provided, the lender cannot complete processing of the application or make the loan until that date. Therefore, you don't need to lose your grace period. You can apply for the consolidation loan at any time during the grace period, qualify for the lower in-school interest rate, and postpone the start of repayment on the debt until at least the end of the grace period.


Fallacy: Some lenders may charge you a fee to consolidate your eligible federal student loans.

Fact: There are no fees to apply for or receive a Federal Consolidation Loan. Current federal regulations do not permit lenders to charge borrowers any fees to obtain this loan. In fact, some lenders do offer payment incentives such as interest rate reductions when you make your payments by electronic funds transfer as well as when you've made a specified number of on-time payments. These incentives can lower your overall cost of repayment with that lender. So while no lenders can charge fees on consolidation loans, some lenders offer money-saving benefits that others do not.


For more information...

Access Group provides FederalConsolidation.Org as a service to borrowers who are considering consolidating, who have already consolidated, or who have questions about Federal Consolidation Loans.

The site provides:

  • Online Application
  • Interactive Calculators
  • Frequently Asked Questions
  • Eligibility Requirements
  • Incentive Information