Many of my Peoria, Pekin, and Galesburg clients with student loans ask me about consolidation of their loans. Some clients have many federal student loans; some have as many as 20 separate loans. Consolidation of student loans is generally only possible with loans issued by the federal government through the U.S. Department of Education. This article will only discuss consolidation of federal student loans; consolidation of private student loans will not be discussed.
The National Consumer Law Center, www.nclc.org, lists the advantages and disadvantages of consolidating federal student loans in its treatise, “Student Loan Law.” The advantages to consolidating your student loans according to this writing are these:
“1. Consolidation allows borrowers to put all of their loans together and make just one monthly payment.
2. Consolidation might help if borrowers need to reduce payments through an extension of the repayment period. (Extending the length of repayment increases the total amount borrowers have to repay over the life of the loan.)
3. Borrowers may get an interest rate break, especially if they have variable rate loans.”
According to the NCLC’s “Student Loan Law” treatise, the disadvantages of consolidating student loans are:
“1. Recent borrowers will generally not save on interest through consolidation. This is because interest rates on federal loans made after July 1, 2006, are fixed. The interest rates for consolidation loans are calculated based on the average interest rates of the loans being consolidated. Borrowers with variable-rate loans from before July 1, 2006, may be able to get very significant interest rate reductions by consolidating.
2. Consolidation extends repayment, often lowering monthly payments, but creates more overall costs in interest over the life of the loan and extends loan obligations further into the future. If borrowers are close to paying off their loans, consolidation may not be worthwhile.
3. Borrowers may lose some rights by consolidating. This is most clearly a problem if the borrower consolidates federal loans into a private consolidation loan (they would lose the rights associated with federal loans). Borrowers may also lose some options and protections if they consolidate certain federal loans, particularly Perkins loans, into other federal loan programs.”
Consolidation is sometimes used by borrowers to cure a default, a failure to make timely installment payments due on a loan. The borrower cures the default by creating a new loan through consolidation. In order to consolidate his or her student loans, the borrower must have at least one FFEL loan (“Federal Family Education Loan”), or one Direct student loan. FFELs were eliminated in 2010, but some are still in existence, today. A Direct student loan, like the name implies, is issued directly by the federal government. Because at least one FFEL or Direct loan must be included in the consolidation, a borrower with only Perkins loans is not eligible for consolidation. Perkins loans are created, issued, and serviced by participating schools. The loans are repaid to the schools. Perkins loans make up a very small percentage of loans issued, approximately 2%, and are being issued less and less.