Student loan consolidation is a good option if you are havingtrouble paying your loans. You can consolidate just one loan, or severalloans. You can consolidate loans even if youre already in default. In fact,consolidation is one good way to get out of default. (To learn about other waysto get out of default on student loans, see StudentLoans: Getting Out of Default.)
When Is Consolidation a Good Option?
A consolidation loan allows you tocombine 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 cant afford the monthly payments on yourfederal student loans under any of the options described in StudentLoan Repayment Options, and dont qualify for a postponement or for loancancellation.
- You qualify for some of the payment plansdescribed in StudentLoan Repayment Options, but you are so deep in debt that you still cantafford your monthly payments.
- You can afford your monthly payments and intendto pay off your loans under a standard plan, but you want to refinance at alower interest rate.
- You are in default on one or more of yourstudent loans and want to get out of default.
Eligibility for Student Loan Consolidation
Thevast majority of federal loans are eligible for consolidation, includingsubsidized and unsubsidized Stafford loans (GSLs), Direct loans, SupplementalLoans for Students (SLSs), Perkins loans, FISLs, and (except in an IBRPlan Consolidation Loan) PLUS Loans. (To find out what type of loan you have,see Types of FederalStudent Loans.)
All borrowers with these loans areeligible to consolidate after they graduate, leave school, or drop belowhalf-time enrollment. However, becauseconsolidation loans have no grace period while you are in school or for the sixmonths afterwards (unlike nonconsolidation loans, which usually do have a graceperiod during this time), getting a such a loan may not be a good idea if youare still in school or just graduated and don't yet have a job.
Restrictions
Tthere are some restrictions to loan consolidation. Privatestudent 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 canconsolidate.
Pros and Cons of Consolidation
Consider both the advantages anddisadvantages of consolidation before obtaining a consolidation loan.
Disadvantages to Consolidation
Potential disadvantages include the possibility that, if youhave old loans, consolidation will cause your interest rate to go up. Moreover,consolidation will extend the repayment period, which means that you will paymore interest over the life of your loan. Consolidation will not completelyclean up your credit report, either. If you were in default, your report willreflect that your previous loans were in default but are now paid in fullthrough the new loan.
In addition, your right to assert a school-related claimagainst the lender of the consolidation loan is not clear. That right might beimportant, for example, if you got a loan to attend a for-profit school becauseit lied about the likelihood of you getting a job after graduation. If youthink you have a claim against the school, it is better to consult an attorneyexperienced 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. Ifyou are in default on any of your government loans, consolidation may offer theopportunity to get out of default and make affordable monthly payments. Wheninterest rates are low, consolidation gives you the advantage of locking in alow rate on your student loans.
Direct Consolidation Loan Program
As with the Direct Loan Program, the federal government providesDirect Consolidation Loans.
Direct Consolidation Loans come with flexible repaymentoptions, including a standard plan, a graduated plan, and an extended plan, andin most circumstances an Income Contingent Repayment Plan (ICRP) or an IncomeBased Repayment Plan (IBR). To learn about these, see StudentLoan Repayment Options.
If you are in default, a Direct Consolidation Loan is a goodway to get out of default and obtain a repayment plan that you can afford. Inorder to get out of default through a Direct Consolidation Loan, you must makethree affordable monthly payments to the loan holder first (which can be as lowas $5) or agree to an ICRP or IBR on the consolidated loan. Borrowers are alsoeligible for deferments in certain circumstances.
Each loan consolidated under the program keeps its interestsubsidy benefit. This can be important if you return to school.
To qualify for a Direct Consolidation Loan, you must have atleast one Direct loan or FFEL. So, if you have only a Perkins loan, forexample, you dont 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 SensitiveRepayment Plan acceptable to you and are eligible for an Income ContingentRepayment Plan. As of 2010, there are no more FFEL Consolidation loansavailable, so the requirement that you cannot get one may be moot.
For more information on DirectConsolidation 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 loansthat have already been consolidated are limited. Here are some examples of whenyou can reconsolidate a student loan:
- If you apply within 180 days after you get a consolidationloan, you can add another loan (either a new or existing loan) into that consolidationloan.
- You can get a new consolidation loan to combine an existingconsolidation loan and another student loan you got either before or after yougot the original consolidation loan.
- You can consolidate two existing consolidation loans.
- FFEL Consolidation Loan borrowers may also convert a FFELConsolidation Loan into a Direct Consolidation Loan, without having to add anyadditional loan, in order to obtain an Income Contingent or Income BasedRepayment Plan, but only if the lender submitted the loan to the guarantyagency 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.
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