Federal student loan consolidation
|Student loans in the U.S.|
|Higher Education Act of 1965 |
U.S. Dept. of Education · FAFSA
Cost of attendance · Expected Family Contribution
|Federal Direct Student Loan Program |
Federal Family Education Loan Program
|Perkins · Stafford |
PLUS · Consolidation Loans
Private student loans
In the United States, the Federal Direct Student Loan Program (FDLP) includes consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.
Interest rates and payments
Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.
The Federal Loan Consolidation Program was created in 1986. In 1998, the United States Congress changed the interest rate to the aforementioned fixed rate weighted mean, effective February 1, 1999. Consolidation loans taken out before that date had a variable interest rate, determined by the individual FDLP loan origination center (e.g., in the case of a university, that university) or FFELP lender (e.g., a third party bank).
In 2005, the Government Accountability Office considered consolidating consolidation loans so that they were exclusively managed through the FDLP. Based on several assumptions about future variations in interest rates, the loan volume, the percentage of defaulters, cost estimates from the United States Department of Education, it concluded that while doing so would incur an additional cost of $46 million, caused by the higher administrative costs of the FDLP compared to the FFELP, this would be offset by a $3,100 million saving comprised in part of avoiding $2,500 million in subsidy costs. In 2008, turmoil in the financial and credit markets has led to the suspension of many loan consolidation programs, including Sallie Mae, Nelnet and Next Student.
- "GAO-06-195 Highlights, STUDENT CONSOLIDATION LOANS: Potential Effects of Making Fiscal Year 2006 Consolidation Loans Exclusively through the Direct Loan Program" (PDF). U.S. Government Accountability Office. 2005-12-01.
- "Frequently Asked Questions About Consolidation Loans". Washington State University Office of Student Financial Aid. 2006-06-09.
- Potier, Beth (2004-02-05). "Amid the hype, opportunity lurks for students with loans". Harvard Gazette. Archived from the original on 2006-12-11.
- "Types of Student Aid: Consolidation Loans". Student Guide 2001–2002. United States Department of Education.
- Teresa Boldt (2005-06-03). "FFELP Consolidation for Students Enrolled or In-Grace: A How-To Guide for Financial Aid Administrators" (PDF). National Student Loan Program.
- Burd, Stephen (2005-08-05). "House Committee Approves Bill to Extend Higher Education Act". Chronicle of Higher Education.
- "Federal Loan Consolidation". Pepperdine University School of Law. 2006.
- "Federal Loan Consolidation". Northwestern University Office of Undergraduate Financial Aid. 2006.
- Federal Student Loan Interest Rate and Consolidation Fact Sheet from the Federal Student Aid site (information is outdated)