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Consolidation Basics

Published by: Peter Wilkniss | Post a Comment

The Federal Student Loan Consolidation Program is authorized by the Higher Education Act of 1965, the same federal law that allows for your current federal loans. Most federal consolidation loans are made by private sector lenders - many of the same lenders that make the types of student loans you currently have - and are guaranteed and subsidized by the federal government.

With a federal consolidation loan, your existing federal loans are refinanced with one new federal loan - not unlike refinancing a mortgage. A federal consolidation loan generally carries the same protections and benefits as your current federal loans plus:

Significantly reducing your monthly loan payments by stretching out the repayment on your federal loans to as long as 30 years (your current federal loans have a 10-year repayment term) and by allowing different types of "graduated" repayment plans that reduce monthly payment even further in the early years of the loan. Of course, stretching out the payments means you will pay more interest over time, but a federal consolidation loan can always be repaid early without penalty.

Locking in today's interest rate on your current federal loans for the entire life of the consolidation loan. The interest rate on federal loans issued prior to July 1, 2006 is variable and is reset by the government every July based on market interest rates. If interest rates go up, the interest payments on your variable rate federal loans will go up as well. With a federal consolidation loan, on the other hand, your interest payments will always be based on the interest rate set at the time of consolidation.

There are absolutely no fees, no credit checks and no employment verifications to apply for a federal consolidation loan. In fact, the government prohibits federal consolidation lenders from charging fees! And, the application process can be completed in a matter of minutes online or over the phone. All that is required is a short federal application, basically containing some personal information, contact information for 2 personal references and information on your current student loans, which your lender can fill in for you. Virtually everyone with federal student loans qualifies for a federal consolidation loan - as long as they have over $7,500 in federal loans and aren't in default on those loans.

One word of caution. As with most things, there are subtleties to consolidating your federal loans, so be sure to consult a professional to assess your particular situation.

Click here to see how much you can save through Vault's no-obligation loan consolidation service.

Ask Vault's Expert

Have questions? Please drop Vault's expert, Peter Wilkniss, a line at pwilkniss@vault.com. Peter holds a BA in Economics for the University of Virginia and a JD/MBA from Columbia (with tons of student loans!). He practiced law at Wachtell, Lipton, Rosen & Katz in New York, and held senior financial management positions on Wall Street, before helping start and run a student loan company.