California Western -- Financial Aid Office

Should You Consolidate?

Think Twice Before You Consolidate

Federal loan consolidation is an option that may help you manage repayment of your federal student loans, particularly if you still have Federal Stafford/Direct Loans with variable interest rates. But, consolidation may not be right for you, particularly if you only have federal student loans with fixed interest rates. You may be able to save money both in terms of your monthly loan payment and in the total amount paid if you do not consolidate your fixed rate federal student loans. If you have both fixed and variable interest rate loans, you may want to consider consolidating only your variable interest rate loans.

There are three primary reasons why you should weigh the benefits and costs before rushing into consolidation.

Federal Stafford/Direct Loans first disbursed on or after July 1, 2006 already have fixed interest rates. Thus, the fixed interest rate structure of the Federal Consolidation Loan provides no advantage if you have these new fixed rate loans.
Most lenders offer some type of on-time payment incentive on Federal Stafford and Federal PLUS Loans that are more beneficial financially than those offered on consolidation loans.
Many graduate/professional student borrowers likely now qualify for the Extended Repayment option on their Federal Stafford/Direct and Federal PLUS loans. That option provides a 25-year repayment period if you have more than $30,000 in eligible federal student loan debt and first borrowed an eligible loan on or after October 7, 1998. This allows you to reduce your monthly loan payment without having to consolidate.

Federal Loan Consolidation Frequently Asked Questions

1. What is a Federal Consolidation Loan?
A Federal Consolidation Loan is a federal student loan that allows a borrower to combine various other federal student loans, such as the Federal Stafford Loan and the Federal Perkins Loan, into a single loan. Federal Consolidation Loans also provide a fixed interest rate, and can extend the repayment period of a borrower's federal loans.

2. Who offers Federal Consolidation Loans?
FFEL Consolidation Loans are offered by student loan lenders and other lending institutions. Direct Consolidation Loans are offered by the US Department of Education.

3. What lender can I choose to provide my Federal Consolidation Loan?
You may consolidate with any lender. If you have at least one Direct Loan, you may obtain a Direct Consolidation Loan from the US Department of Education. There is a specific exception to this rule: any student who does not have a Direct Loan may still obtain a Direct Consolidation Loan if the student cannot find a lender who provides income contingent repayment terms which the student finds acceptable.

4, What are the advantages of a Federal Consolidation Loan?
Federal Consolidation Loans provide several benefits. Borrowers can combine all their federal student loans into a single loan, with a single lender, and one monthly payment. This can be a particular convenience for borrowers with multiple lenders. Borrowers can reduce their monthly payments by extending the repayment period of their federal loans to as much as 30 years. Also, the Federal Consolidation Loan allows students to fix the interest rate of their variable rate loans. Federal Consolidation Loans retain all of the deferment and cancellation provisions of the Stafford Loan. There are no fees charged for a Federal Consolidation Loan. Just as with the Stafford Loan, there is no prepayment penalty for the Federal Consolidation Loan.

5. What are the disadvantages of a Federal Consolidation Loan?

Federal Stafford/Direct Loans first disbursed on or after July 1, 2006 already have fixed interest rates. Thus, the fixed interest rate structure of the Federal Consolidation Loan provides no advantage if you have these new fixed rate loans. Federal Consolidation Loans do not have a grace period. If you consolidate before the end of your grace period (see "When should I consolidate?"), you will have to begin payments within 60 days. The interest rate is very slightly higher than the average rate of your consolidated loans – the rate of the Federal Consolidation Loan is rounded up to the nearest 1/8%. Extending your loan period will cause you to pay out more money over the life of the loan.

6. What is the interest rate of a Federal Consolidation Loan?
The interest rate of a Federal Consolidation Loan is the weighted average of the current interest rates of the loans to be consolidated, rounded up to the next highest 1/8%.

7. What is the repayment period of a Federal Consolidation Loan?
The maximum repayment period of a Federal Consolidation Loan depends on the total amount of your student loan debt (federal and non-federal combined):

15 years: $10,000 – $19,999
20 years: $20,000 – $39,999
25 years: $40,000 – $59,999
30 years: $60,000 or more

8. Which loans can I consolidate?
You may consolidate any or all of your Federal Stafford Loans (subsidized or unsubsidized) and Federal Perkins Loans. You may also consolidate loans from the PLUS, SLS, FISL, HPSL, NSL, and HEAL programs. You may consolidate a previous Federal Consolidation loan, as long as you combine it with at least one other unconsolidated loan. You may not consolidate your alternative loans (also referred to as private loans) using a Federal Consolidation Loan.

9. I only have one federal student loan; can I still consolidate it?
Yes.

10. My Federal Perkins Loan has a fixed interest rate already; should I consolidate it?
That depends. The Perkins Loan has better deferment and cancellation provisions than the Federal Consolidation Loan. We suggest you review these before consolidating your Perkins Loan. On the other hand, a borrower might not want to keep the loan separate from his other federal loans. Also, including Perkins Loans in a consolidation can alter the interest rate. Ask your lender to tell you whether including your Perkins would raise, lower, or have no effect on your Consolidation Loan's interest rate.

11. I have an old Federal Consolidation Loan, but now I have unconsolidated loans that I would like to consolidate as well. Can I combine the new loans and the old Federal Consolidation Loan?
Yes. The interest rate will be the weighted average of the old Federal Consolidation Loan and the new unconsolidated loans.

12. I only have an old Federal Consolidation Loan; can I reconsolidate it?
No. A Federal Consolidation Loan can only be reconsolidated by combining it with an unconsolidated loan. See question 12. There is no way to "refinance" an old consolidation loan to get the current rate.

13. When should I consolidate?
Probably the best time to consolidate is shortly before the end of the six-month grace period of your Stafford loans. Since the interest rate on the Stafford loan increases at the end of the grace period (when repayment begins), your Federal Consolidation Loan interest rate can be up to 0.6% lower if you consolidate during the grace period. But don't be in too much of a hurry; since the consolidation loan has no grace period, you'll immediately go into repayment once the loans have been consolidated. Unless there are interest rate changes which might affect your decision (see next paragraph), we recommend that you ask your lender to make the effective date of your consolidation occur just before your Stafford loans would otherwise enter repayment.

Borrowers should also look into whether a large change in the Stafford interest rate will occur on the next July 1. Stafford interest rates are recalculated at the end of every May and put into effect on July 1 – stay informed about interest rates and check with your lender or with the Financial Aid Office to see how the annual interest rate recalculation could affect your consolidation loan. In the end, the choice of when to consolidate depends on your individual situation.

14. Are there differences between various lenders' Federal Consolidation Loans?
The interest rate on Federal Consolidation Loans will be the same no matter who provides your loan. Some lenders do provide incentives such as interest rate markdowns for direct deposit or a certain number of timely payments; these incentives may differ from lender to lender.

15. What is the difference between the terms of FFEL Consolidation Loans and Direct Consolidation Loans?
The Federal Family Education Loan Program, or FFEL, is the federal student loan program in which California Western School of Law participates. In it, Stafford loans are originated by banks or other lending institutions. FFEL Consolidation Loans are offered by the same lenders that offer FFEL Stafford loans, and by some consolidation-only lenders as well. All Stafford Loans obtained during study at California Western School of Law are FFEL Stafford Loans.

Direct Stafford Loans and Direct Consolidation Loans are provided by the US Department of Education directly, and do not involve private lending institutions. Some students may have obtained Direct Loans during their studies at other schools. If you are not sure which kind of Stafford Loan you took out, you may contact your lender or the Financial Aid Office to obtain that information.

The terms of Direct and FFEL Consolidation Loans are similar in terms and interest rates; the main difference is in the repayment options available. FFEL Consolidation lenders are required to offer to the borrower a standard repayment plan, a graduated repayment plan, and an income-sensitive repayment plan. The details of those plans may differ by FFEL lender. The repayment plans in the Direct Loan program include standard repayment, graduated repayment, extended repayment, and income-contingent repayment. The monthly payment amount under income contingent repayment is based upon a formula that takes into account the borrower's income, family size, and loan amount. Under income contingent repayment, balances unpaid after 25 years are forgiven. Some borrowers who have the option choose Direct Loan consolidation precisely because it provides them with the option of repaying under the income contingent repayment plan.

16. My lender offered me a bunch of incentives if I paid my Stafford Loans on time. Can I get these on my Federal Consolidation Loan?
Lenders do not have as high a profit margin on Federal Consolidation Loans as on Stafford Loans. Sallie Mae and The Access Group both have on-time payment incentive programs where the interest rate reduction after four years of o-time payments is 1% for Federal Consolidation but 2% for Stafford. Total Higher Education's "THE Bonus" does apply to its Federal Consolidation Loan, but again is not as large as it is under THE's Stafford program.

17. I got this phone call/official-looking mailing/email about consolidating my loans NOW, or I would miss out! Yikes!
Some lenders have recently entered the Federal Consolidation Loan market, seeking to benefit from the high demand created when interest rates were lower. Some of these lenders seek to increase their market share by using shady tactics such as high-pressure telemarketing, official-looking mailings, and false implications that they are somehow offering special terms on Federal Consolidation Loans, when in fact they are simply providing the same terms as other lenders. Bear in mind that just because a heavily promoted offer is expiring soon does not make that offer inherently better. Please compare any offer you receive with those from lenders you already trust – particularly when the offer comes from a lender with whom you have no prior relationship.

18. I have more questions. Where can I go for more information?

California Western School of Law Financial Aid Office:
(619) 525-7060
http://www.cwsl.edu/ Go to the Quick Links box and select "Financial Aid"

US Department of Education (Direct Consolidation Loan Information)
(800) 557-7392
http://loanconsolidation.ed.gov/

Total Higher Education
(888) 843-3095
http://www.northstar.org/consolidation.html

Access Group
(800) 282-1550 http://www1.accessgroup.org/students/Repayment/consolidation.htm

Private Loan Consolidation

You cannot include private loans in a federal consolidation loan. Nevertheless, there are several options for refinancing private education loans. If you elect to consolidate your private loans, consolidate them separately from your federal loans as the federal consolidation loans offer deferment and cancellation benefits, which may be lost in private loan consolidation, and lower interest rates for consolidating federal student loans.

There are private education loan consolidation products available from certain lenders. These loans should not be confused with Federal Consolidation Loans. They generally charge a higher interest rate than the loans they are intended to replace, do not have a fixed rate, and charge an additional loan fee in addition to the loan fees already incurred on the original loan. Borrowers should carefully consider whether the benefits of these loan products are worth the additional costs.

The main benefit of consolidating private loans is obtaining a single monthly payment. Your monthly loan payment may be decreased with consolidation because the length of your loan repayment is increased. This also results in increased interest to be repaid over the life of the loan.

It is possible to obtain a lower interest rate through a private consolidation loan if your credit score has improved significantly since you first obtained your private loans. If your credit score has increased by 50-100 points or more, you may be able to get a lower interest rate by consolidating your debt with another lender. You can also check with your current loan holder to see if they will reduce your interest rate based on your improved credit score.

When evaluating a private consolidation loan, ask whether the interest rate is fixed or variable, whether there are any fees, and whether there are prepayment penalties.

There are several lenders offering private consolidation loans including:

Key Bank (800) 539-5363 www.key.com

Sallie Mae (866) 380-5005 www.SallieMae.com

Wells Fargo (800) 378-5526 www.wellsfargo.com

We recommend that, should you choose to consolidate your private loans, you take the time to compare several programs before committing to a private loan consolidation program.

Home Equity Loans

Finally, students who are homeowners may want to consider using a fixed interest rate home equity loan to repay your private loans. Check with your financial advisor for assistance in determining whether this is a good strategy for you.