Student Loan Consolidation

If you are having trouble paying student loans, consider a consolidation loan.

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Student loan consolidation is a good option if you are having trouble paying your loans. You can “consolidate” just one loan, or several loans. You can consolidate loans even if you’re already in default. In fact, consolidation is one good way to get out of default. (To learn about other ways to get out of default on student loans, see Student Loans: Getting Out of Default.)

When Is Consolidation a Good Option?

A consolidation loan allows you to combine your federal student loans into a single loan with one monthly payment. This may be a good option if any of the following are true:

  • You can’t afford the monthly payments on your federal student loans under any of the options described in Student Loan Repayment Options, and don’t qualify for a postponement or for loan cancellation.
  • You qualify for some of the payment plans described in Student Loan Repayment Options, but you are so deep in debt that you still can’t afford your monthly payments.
  • You can afford your monthly payments and intend to pay off your loans under a standard plan, but you want to refinance at a lower interest rate.
  • You are in default on one or more of your student loans and want to get out of default.

Eligibility for Student Loan Consolidation

The vast majority of federal loans are eligible for consolidation, including subsidized and unsubsidized Stafford loans (GSLs), Direct loans, Supplemental Loans for Students (SLSs), Perkins loans, FISLs, and (except in an IBR Plan Consolidation Loan) PLUS Loans. (To find out what type of loan you have, see Types of Federal Student Loans.)

All borrowers with these loans are eligible to consolidate after they graduate, leave school, or drop below half-time enrollment. However, because consolidation loans have no grace period while you are in school or for the six months afterwards (unlike nonconsolidation loans, which usually do have a grace period during this time), getting a such a loan may not be a good idea if you are still in school or just graduated and don't yet have a job.

Restrictions

Tthere are some restrictions to loan consolidation. Private student loans cannot be included in a federal consolidation loan. In addition, spouses cannot consolidate their loans into a single consolidation loan. And, borrowers who are in default must meet certain requirements before they can consolidate.

Pros and Cons of Consolidation

Consider both the advantages and disadvantages of consolidation before obtaining a consolidation loan.

Disadvantages to Consolidation

Potential disadvantages include the possibility that, if you have old loans, consolidation will cause your interest rate to go up. Moreover, consolidation will extend the repayment period, which means that you will pay more interest over the life of your loan. Consolidation will not completely clean up your credit report, either. If you were in default, your report will reflect that your previous loans were in default but are now paid in full through the new loan.

In addition, your right to assert a school-related claim against the lender of the consolidation loan is not clear. That right might be important, for example, if you got a loan to attend a for-profit school because it lied about the likelihood of you getting a job after graduation. If you think you have a claim against the school, it is better to consult an attorney experienced in bringing these kinds of cases before you consolidate your loan.

To find an experienced student loan lawyer, visit Nolo's Lawyer Directory.

Advantages to Consolidation

Loan consolidation offers some potential advantages, too. If you are in default on any of your government loans, consolidation may offer the opportunity to get out of default and make affordable monthly payments. When interest rates are low, consolidation gives you the advantage of locking in a low rate on your student loans.

Direct Consolidation Loan Program

As with the Direct Loan Program, the federal government provides Direct Consolidation Loans.

Direct Consolidation Loans come with flexible repayment options, including a standard plan, a graduated plan, and an extended plan, and in most circumstances an Income Contingent Repayment Plan (ICRP) or an Income Based Repayment Plan (IBR). To learn about these, see Student Loan Repayment Options.

If you are in default, a Direct Consolidation Loan is a good way to get out of default and obtain a repayment plan that you can afford. In order to get out of default through a Direct Consolidation Loan, you must make three affordable monthly payments to the loan holder first (which can be as low as $5) or agree to an ICRP or IBR on the consolidated loan. Borrowers are also eligible for deferments in certain circumstances.

Each loan consolidated under the program keeps its interest subsidy benefit. This can be important if you return to school.

To qualify for a Direct Consolidation Loan, you must have at least one Direct loan or FFEL. So, if you have only a Perkins loan, for example, you don’t qualify. If you have at least one FFEL, but no Direct loans, then you must certify you are unable to obtain a FFEL with an Income Sensitive Repayment Plan “acceptable” to you and are eligible for an Income Contingent Repayment Plan. As of 2010, there are no more FFEL Consolidation loans available, so the requirement that you cannot get one may be moot.

For more information on Direct Consolidation Loans and to get an application for loan consolidation, go to http://loanconsolidation.ed.gov/index.html.

Reconsolidation

The circumstances under which you can consolidate a loan or loans that have already been consolidated are limited. Here are some examples of when you can reconsolidate a student loan:

  • If you apply within 180 days after you get a consolidation loan, you can add another loan (either a new or existing loan) into that consolidation loan.
  • You can get a new consolidation loan to combine an existing consolidation loan and another student loan you got either before or after you got the original consolidation loan.
  • You can consolidate two existing consolidation loans.
  • FFEL Consolidation Loan borrowers may also convert a FFEL Consolidation Loan into a Direct Consolidation Loan, without having to add any additional loan, in order to obtain an Income Contingent or Income Based Repayment Plan, but only if the lender submitted the loan to the guaranty agency to help the borrower avoid default.

To learn about student loan repayment options, getting out of default, and more, see Nolo's Student Loan Debt area. 

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

by: , Attorney

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