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A consolidation loan is just what it sounds like: You can take two or more outstanding loans and refinance them into one. As with the Stafford Loans, there are both Direct and FFEL consolidation programs.

To a college grad swamped with multiple student loans that have come due, loan consolidation is an enticing option. When you consolidate, a lending institution pays off your existing balances and replaces them with a new, consolidated loan.

Federal versus private consolidation

The key terms for federal consolidation loans do not vary by lender: no application or origination fees are allowed and there are no prepayment penalties. Federal law sets the period of time for paying back the loans and sets a ceiling on the interest rate.

Private consolidation lenders, on the other hand, are not subject to those terms and may include variable rates and any number of fees. What’s more, some benefits of a federal consolidation loan, such as interest subsidies on deferred loans, are not available on private loans.

Consolidating offers several benefits:
  • You have just one check to write each month and just one repayment plan to track.
  • You lock in a fixed interest rate that takes the sweat out of variable-rate loans. When interest rates are low, consolidating loans can save a great deal of money.
  • You can extend your repayment timetable from 10 years up to 30 years, depending on the size of your debt, so you can shrink your monthly payments. A consolidation loan may lower your monthly loan payments by as much as 40 percent.

Yet despite the appeal — and its popularity — student loan consolidation isn’t for everyone. Here are some frequently asked questions and answers that may help determine if it’s the right move for you.

Should I consolidate?

If you need more cash in your pocket right now, consolidation can help by extending the life of your loan and thus trimming your monthly payments — although the length of your repayment terms will depend on the amount of debt you have, and you may not be able to extend at all. But if interest rates are low you can lock in long-term savings, since less of your money will go to interest. You may also have access to a new repayment schedule (like an income-contingent plan) that’s a little easier on your wallet. If you don’t care about the extra cash and just want a consolidation for the simplicity of a single monthly payment, you can use any money you save to pay down the principal. (There are no prepayment penalties for student consolidation loans.)

When is consolidation a bad idea?

If you have only a couple more years or a few thousand more dollars to go till you pay off your student loans, consolidation is probably more hassle than it’s worth. Switching to a new lending institution might eliminate any benefits you’ve earned, like lower interest rates for on-time payments over the years. Plus, consolidating could make it impossible for you to have a Perkins Loan forgiven or reduced. If you can handle your monthly loan payment as is, carefully investigate how consolidating will change the total amount you’re expected to repay.

Who can consolidate my loans?

You can get a consolidation loan from any private lending institution with government approval, or from the Department of Education itself. Not all consolidators are created equal, however. Some offer favorable terms like interest-rate reduction for making on-time payments or choosing automatic withdrawal; others may offer repayment plans that better suit your financial situation. maintains a list of student loan institutions, including large banks; private companies like Sallie Mae; and state education system lenders like the Missouri Higher Education Loan Authority and the Utah Higher Education Assistance Authority. You should do enough research to be able to negotiate the most favorable terms. Public and private loans can’t be combined, but if you have multiple private loans, you can consolidate those, too; contact your lending institutions to find out how.

When should I do it?

If you’re just finishing college, you’ll want to consolidate your loans after you graduate but before your grace period ends, so that you can take advantage of the lower in-school interest rate (the 91-day T-bill rate plus 1.7 percent, rather than the standard repayment rate of T-bill rate plus 2.3 percent). Timing is everything: You’ll need to complete all the paperwork and have it processed and approved before repayment begins. The downside is that your grace period will end once your consolidation loan goes through. If you’ve already been paying off your loans for a while, you can consolidate at any time.

How can I get the best interest rate?

The interest rate on your consolidation loans is the weighted average of the interest rates on the loans you have now, rounded up to the nearest 1/8 of a percent and capped at 8.25 percent. Confused? You can get help doing the math with an online calculator at the Federal Direct Consolidation Loans website. Click on “Borrower Services,” then “Online Calculator.” Interest rates are determined by the federal government and change each year on July 1, so check with a lender to get their take on possible rate fluctuation.

Can I consolidate more than once?

Current law dictates that you can only consolidate once, so if you consolidate at a 6 percent interest rate and rates later drop to 3 percent, you’re out of luck. There are two exceptions: if you’ve since gone back to school and acquired new student loans, or if an outstanding loan was excluded from your original consolidation. In those cases, you may be able to have another go at it.

Can I bundle my student loans with my spouse’s?

Yes, a married couple can jointly consolidate their loans, but it may not be a good idea. To do so, you’ll both have to agree to assume full responsibility for payment of the debt. So if your marriage ends in divorce, your loans will still be living together and one ex-spouse will be held responsible if the other refuses to pay up. You also won’t be able to get an in-school loan deferment, because both of you would have to be enrolled to qualify.

Will I lose the interest subsidy on my subsidized loans?

No. Although your existing loans will be packaged as one larger loan, your subsidized and unsubsidized loans are grouped so that you won’t be held responsible for extra interest on subsidized loans.

How is loan serialization different from consolidation?

With loan serialization, a single lender buys your student loans and “stacks” them; you maintain your original terms and interest rates, but pay the loans off one at a time, starting with the loan with the worst interest rate. Unlike with refinancing, serialization won’t lock in a good interest rate. Perkins Loans cannot be serialized.

What fees can I expect to pay?

You shouldn’t pay origination or any other fees to get a consolidation loan.

How do I apply for a consolidation loan?

Most lending institutions, including the federal government, offer both online and paper applications. If you have all Direct Loans, you can even apply by phone. Besides basic personal contact information, you’ll need to be able to provide data on the type of loan you have, its balance, and the current loan holder. You’ll also be asked to provide your employer’s name and contact information, the name of your school, and the names of a few references, such as professors or employers. Ask the lender you’ve chosen for an application, complete it, and then wait for them to send you the paperwork to sign. Go over everything carefully for accuracy, because the lending institution will check to verify that the information you provided is true. Once your loan has been approved, you’ll receive notification and a new repayment schedule from your new loan holder.