How a Federal Loan Consolidation Program Works

Federal loan consolidation programs work by combining a number of smaller loans into one bigger loan from a single lender. Consolidating your loans gives you one single payment to one lender, instead of several; it can also save you some money on interest if you have one loan with a particularly high interest rate. The most common kind of federal consolidation loan is targeted towards students with several different federal student loans, such as Stafford loans, Perkins loans, or FFEL or Plus loans. 

What Are the Terms? 

With a federal consolidation loan, the interest is based on calculating the weighted average interest rates on all of the loans you wish to consolidate. “Weighted average” means that the interest rate on the larger loans will count more towards the new interest rate than the interest rates on the smaller loans. For example, if you have one $5,000 loan with a 5% interest rate and a $10,000 loan with a 6.8% interest rate, your new rate if you consolidate these loans would be about 6.2%. However, if you have a 5% rate on the $10,000 loan and a 6.8% rate on the $5,000 loan, your new rate would be about 5.6%, because you have a smaller rate on a larger loan. Different lenders may offer you slightly higher interest rates, depending on your specific credit history and financial situation. 

You will usually have four options for repayment plans. These options similar to the repayment plans you were offered with your initial student loans. The standard repayment plan is ten years with equal payments every month. You may also opt for a graduated repayment plan, in which your initial monthly payments are lower, then are raised a couple years later, and then raised again once or twice more over the life of your loan. Depending on your lender and the total amount of your new consolidation loan, you may also have the option to extend the length of your loan, anywhere from 12 to 30 years. 

There are some restrictions, however. You may not consolidate private and federal loans together. If some of your student loans are in your name, and others are in your parents’ name, you and your parents may not consolidate all those loans together. If you are married, you may not consolidate both your loans and your spouse’s loans together. Finally, you must wait until after graduation to consolidate your loans, and once they are consolidated, you must keep that new loan.

How Do I Apply? 

Many private lenders offer federal consolidation loans, just as the private lenders offer the loans themselves.  This will allow you to contact a number of different lenders so you can compare interest rates. However, some lenders may require a minimum total amount for your new loan; usually your new loan would have to be for at least $7,500, but some lenders offer Federal Consolidation Loans with a $5,000 minimum. 

Start with your own lender, because they may give you the best rate. Once you have decided on a lender, simply fill out the loan application. When your loan is approved, your lender will pay off the existing loans and within sixty days will start sending you bills for your new loan.

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