Another loan repayment option is federal loan consolidation. A Federal Consolidation Loan (FCL) is a loan that you can borrow to pay off some or all of your existing eligible federal student loans, both graduate and undergraduate. The FCL has a fixed interest rate with a repayment term of up to 30 years, depending on your total student loan debt, including any private student loans you may have.
Reasons to Consolidate
- To reduce your monthly loan payment and increase monthly cash flow
- To have the convenience of single statement billing (if you have federal loans with more than one lender)
- To renew eligibility for current deferments or become eligible for new deferments
- To lock in a fixed interest rate on your variable rate loans for the life of the loan
Reasons Not to Consolidate
- Potential for higher interest cost because consolidation loan is repaid over longer period of time
- If you consolidate Stafford Loans that still have a variable rate and interest rates fall in the future, you’ll be locked into a higher interest rate
- Loss of any current repayment incentives you are receiving on the loans you plan to consolidate
- Inability to re-consolidate if the variable interest rate on Federal Stafford/Direct Loans borrowed prior to 7/1/06 drops lower in the future
- Possible loss of discharge provisions for certain loans, if consolidated (e.g., Federal Perkins Loans)
- Possible loss of interest subsidy during deferment for certain loans, if consolidated (e.g., Federal Perkins Loans)
- Some lenders require a minimum loan amount before you can consolidate
- If you and your spouse consolidated when “married consolidation” was an option, if you divorce, both of you are responsible for repaying the full amount of jointly consolidated loans (“Married consolidation” is no longer available)
Consolidated Interest Rate
There are no fees for Federal Consolidation Loans. The interest rate is fixed and is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest 1/8th of one percent, and capped at 8.25%.
Since the consolidation interest rate is a weighted average of all interest rates on your loans, you should contact your financial aid office to inquire whether consolidation is to your financial advantage.
Depending on the amount of your outstanding student loan balance, you have up to 30 years to repay, and you have a choice of the same repayment options offered for Federal Stafford Loans. There is no prepayment penalty, deferment and forbearance are available, and some lenders offer repayment incentives. For more information, please contact your lender.