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Aug 19, 2008

Reconsolidating Student Loan Benefits

OLR Research report has quite nicely summarized benefits (as well as cons) of student loan consolidation.

In short:

- Student loans and their consolidation are governed by the Higher Education Act of 1965 (HEA), governs student loans and their consolidation.
- It clearly states what people who have borrowed money under various federal loan programs or from multiple sources CAN consolidate their loans after they leave school.
- several loans with varying repayment terms and interest rates CAN be merged into a single loan; repayment CAN be extended up to thirty years - AND at a fixed monthly payment.

FIXED is the key word here. It may vary, but in general weighted average of the loans being consolidated affacts it.
Rates are capped at 8. 25%.
PLEASE NOTE that a borrower whose loans are all held by one lender can ask only that lender for consolidation (it's the “single holder” rule). Soem exceptions may apply.

IMPORTANT: a borrower can consolidate loans just ONCE.

In detail:


The law permits a borrower to obtain a new consolidation loan if:
- he has at least one outstanding eligible loan that was not included in the initial consolidation OR
- consolidated loans then borrowed again under an eligible loan program.

Benefits of Consolidating student loans

1) consolidation lowers a borrower’s monthly payment - naturally, by extending the payment period.
2) consolidation yields a single billing statement and removes the risk inherent if variable rates rise.

Drawbacks of Consolidating student loans

1) borrowers pay more in interest because of the longer repayment period and cannot benefit if rates drop after they consolidate.

Consolidation Loan Terms

The above eligible loans have 10-year terms. A consolidation loan repayment term can be up to 30 years. The term is determined by the total consolidation loan balance plus the balances of other education loans as follows:

• less than $ 7,500—10 years;

• between $ 7,500 and $ 10,000—up to 12 years;

• between $ 10,000 and $ 20,000—up to 15 years;

• between $ 20,000 and $ 40,000—up to 20 years;

• between $ 40,000 and $ 60,000—up to 25 years;

• $ 60,000 or more-30 years

Consolidation loan interest is fixed. The rate is determined by weighted average of the loans being consolidated, rounded up to the nearest one-eighth (1/8) percent. Rates are capped at 8. 25%.

Consolidation lenders can offer four repayment plans:

• Standard: the monthly payment amount is fixed over the life of the loan

• Income Sensitive: monthly payments are based on, and change with, the borrower’s income

• Graduated: monthly payments start low and gradually increase over the life of the loan

• Extended: for loans over $ 30,000, borrowers can extend payments over 25 years under a level or graduated repayment schedule

A borrower whose loans are all held by a single lender must request consolidation from that lender. This is called the “single holder” rule. But a borrower with a single lender can seek a consolidation loan from another lender, but he must certify that (1) he sought and was unable to obtain a consolidation loan through the institution that holds his Stafford or PLUS loan or (2) the holder would not provide a consolidation loan with an income-sensitive repayment schedule. People who have borrowed from multiple sources can seek a consolidation loan from any eligible lender.

Eligible Loans

The loans eligible for consolidation are: subsidized (based on financial need) and unsubsidized Stafford Loans; Parent Loans for Undergraduate Students (PLUS); Supplemental Loans for Students (SLS); Perkins Loans; and Nursing Student, Health Professions Student, and Health Education Assistance loans. A borrower must be in the grace period (the six months after leaving school) or have begun repayment on each loan he wants to consolidate. Loans in default can be consolidated only after the borrower makes satisfactory repayment arrangements with the loan holder or agrees to repay the consolidating lender under an income-sensitive repayment schedule.

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