The Federal Loan Consolidation Process Explained

Federal loan consolidation programs can help reduce the debt burden of your existing student loans. One of the primary advantages of federal student loans is the ability to consolidate in the future, without penalties. This process helps both students and parents of students who have outstanding debts to the Department of Education in their name.

What is Federal Student Loan Consolidation?

Federal student loan consolidation allows you to combine the remaining balance of two or more loans into one new loan. You can combine both interest and principal debt amounts. For students, you have the ability to combine debts across semesters, years or even degree programs. For example, you can combine your undergraduate debt with your graduate loan debt. For parents who have taken loans for multiple students, you can combine the loan sums for various children through the consolidation program. While the sum you owe is not reduced, you will be able to simplify your payments into one monthly bill. In the process, you may opt to change the terms of your loan to reduce your debt burden or even shorten your loan options.

Who Qualifies for Federal Student Loan Consolidation?

Essentially every borrower who has taken a loan through the Department of Education will qualify for the program. This includes Stafford Loans, Perkins Loans, PLUS loans and other options, whether they are subsidized or unsubsidized. The major stipulation on the program, however, is that all debts must be in good standing prior to entering the consolidation process. If your debts are past due, you will have to bring them current prior to being eligible. This means entering loan rehabilitation programs for some borrowers. Rehabilitation is possible on your debts if you are able to successfully make many months of payments prior to the loan actually entering default.

What are the Risks of Federal Student Loan Consolidation?

Some debt consolidation programs result in credit penalties or financial penalties to a borrower. This can even be true of private student loans. A lender loses money through consolidation because you are essentially prepaying a debt, resulting in lower interest payments over time. This is not true with Department of Education loans. The loans are not designed to earn a profit. In fact, the interest rates are assessed to accommodate for inflation more than to gain a reward for the lender. As long as your consolidation does not result in a net loss for the government, your consolidation is not penalized.

Are there Alternatives to Federal Student Loan Consolidation?

Federal student loan consolidation is the best option for borrowers looking to simplify the payments they owe each month. The program does not drastically reduce debt you owe and will not typically result in lower financing fees. If you are looking for a solution to these other problems, you will need to consider forgiveness or discharge options. Forgiveness is only offered to a narrow range of students who go into public service programs. Discharge is only offered if a borrower dies, becomes disabled or can no longer afford a fair standard of living given the current debt obligation.


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