Federal student loan consolidation

Student Loan Consolidation in the FFELP (Federal Family Education Loan Program) is designed to help students pay their Federally Backed student loans. There are many benefits to consolidating in the FFELP program.

1. Fixed Interest Rate
2. Lower Monthly Payments
3. No Pre-Payment Penalties
4. Retain all your federal rights such as Deferment and Forbearance
5. Subsidized portions remain subsidized even after consolidating
6. Forgiveness rights for Stafford Loans are retained.

There is no downside to consolidating your loans. Even though the program increases the repayment term from the standard 10 year term to 15, 20, 25, or 30 years depending on your loan balance. But, your right to repay without pre-payment penalties makes the point moot.

Maximum repayment terms are as follows:

$10,000 - $19,999 (15 years)

$20K - $39,999 (20 years)

$40k - $59,999 (25 years)

$60K + (30 years)

Ultimately the FFELP consolidation program provides you with financial freedom and flexibility. Additionally, there is a space on the application where you can set your own repayment term up to the maximum term for your loan balance. Students should typically consolidate their loans after every time they switch schools, between any breaks (summer break not included), and whenever enrolled less than 6 credits. They should also consolidate while in their grace period to take advantage of the .6 in school/in grace reduction in interest rate. Most consolidation companies can save your entire grace period by holding the application until right before your grace period end date. Make sure you mention your grace period to the people you are consolidating with. New legislation passed in June 2006 has also made it possible for students who only have a single lender to benefit from consolidating. These students will also benefit from a fixed interest rate even though it's not a consolidation in the true sense of the word. Also, in July of 2006 new Stafford Loans were issued at a fixed rate of 6.8% and Parent Plus Loans at 7.9%. Purkins Loans are always issued at 5.0%. Students with Stafford Loans and Parent Plus Loans prior to July 2006 had variable rates. The rates were reset from 5.375% to 7.14% for Stafford Loans and from 6.1% to 7.94% for Parent Plus Loans.

The interest rate for a FFELP Consolidation loan is derived by taking the weighted average rounded up to the nearest 1/8 of a percent. A consolidation of variable rate Stafford loans will typically lock you in at 6.625% (in grace) or 7.25% (out of grace). Some companies offer a 1/4 rate reduction for signing up for automatic check debit and an additional rate reduction for maintaining on-time payments for a specified amount of time.

A little more on weighted average:

Definition: An average that takes into account the proportional relevance of each component rather than treating each component equally.

Suppose you had these loans

$2,000 @ 4%

$5,000 @ 1%

$3,000 @ 10%

A standard average puts you at 5%.

Weighted average:

($2,000 x 4%) = 80

($5,000 x 1%) = 50

($3,000 x 10%) = 300

80 + 50 + 300 = 430/$10,000 = 4.3%

As you can see the $5,000 at 1% weighs more heavily on the interest rate than the other two loans. If you had a consolidation set for the exact same amount of time as the original loans you would pay EXACTLY the same amount of money if a weighted average was used.

Consolidate your loans, it could only help you. If you get a call from a consolidation company make sure they are in the federal program and can provide you with a registered number with the US Department of Education.