What It Is
A consolidation loan combines multiple federal student or parent loans into one larger loan from a single lender, which is then used to pay off the balances on the other loans. This includes subsidized and unsubsidized Direct, Perkins, HPL, Nursing, and Parent PLUS loans; Private student loans cannot be included in a consolidation loan.
The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a percentage point. The weighted average does not change the cost of the individual loans; it will always be in between the highest and lowest rates of the underlying loans. Thus, the amount of interest you pay over the lifetime of the loan will be about the same as if you did not consolidate. You actually pay a little bit more, due to the 1/8th percentage point increase on the interest rate. If you were deferring the interest on an unsubsidized Federal Direct loan, it will be capitalized and added to the loan principal when you consolidate.
How It Works
Even if all of your loans are held by a single lender, you can choose to consolidate with any lender. Students can only consolidate during their grace period or after their loans have entered repayment. Parents can consolidate at any time. A consolidation loan can be consolidated again only once, as long as the new consolidation loan includes at least one unconsolidated loan, or another consolidation loan. However, reconsolidation does not allow you to "relock" the interest rates on an existing consolidation loan. Once the interest rate on a consolidation loan is fixed, it does not change.
A consolidation loan often reduces the amount of your monthly payment by extending (12-30 years) the term of the loan beyond the 10-year repayment plan that is the standard for federal loans. This reduction in monthly payment can make the loan easier to repay for some borrowers. However, by extending the term of a loan, the total amount of interest you will pay is increased.
If you consolidate, repayment on the loan will begin within 60 days of its disbursement. When your loan enters repayment early as a result of consolidation, you will lose the remainder of your grace period.
Keep In Mind
You should never be charged a fee to consolidate.
If you choose to include a Perkins Loan in your consolidation loan, you will lose some of its favorable loan forgiveness provisions. Perkins Loans will also be treated as unsubsidized when consolidated, meaning the government will no longer pay the interest on the loan while you are in deferment.
FinAid's Loan Consolidation Calculator (opens in new window) is a useful tool for weighing the benefits vs. advantages of consolidating your loans. It compares the reduction in your monthly payment with the increase in the total interest paid over the loan term. It will also calculate the interest rate on your consolidation loan.
For general information on federal loan consolidation, visit FinAid.org (opens in new window). For specific lender information, visit any of the lenders below (links open in new window):