Federal Loan Consolidation Information
IF YOU MISSED THE JULY 1, 2006 DEADLINE TO CONSOLIDATE YOUR FEDERAL LOANS
Consolidation may be beneficial but there are some things to consider before consolidating your Federal loans. Below are some answers to the questions many of you have asked:
What does consolidation mean? Consolidation means taking your Federal loans that are in grace, repayment, deferment, or default status, issued at different times and at different rates, and rolling them up into one loan with a single, fixed interest rate. The interest rate is determined by your consolidator based upon the weighted average of your outstanding loans. You should contact your lender to find out what that interest rate on your consolidation loan will be.
What is the current interest rate?
The current interest rate is 6.8% fixed for Stafford loans disbursed on or after July 1, 2006.
Stafford loans that disbursed between July 1, 1998 and June 30, 2006, that have not been consolidated, are accruing interest at a 6.54% variable rate for borrowers who are in school or in grace and a 7.14% variable rate for borrowers who are in repayment.
Stafford loans that disbursed between July 1, 1995 and June 30, 1998, that have not been consolidated, are accruing interest at a 7.34% variable rate.
Stafford loans that disbursed between July 1, 1994 and June 30, 1995, that have not been consolidated, are accruing interest at a 7.94% variable rate.
Who can consolidate? You must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in grace, repayment, deferment or default status. Loans that are in an in-school status cannot be included in a Federal loan consolidation.
What loans can be consolidated? Any Federal loans, such as Stafford Direct, FFEL, Grad PLUS or Perkins loans. Private loans cannot be included in a Federal loan consolidation.
What if I have already consolidated some of my Federal loans? Once you have consolidated your loans they become set at a fixed interest rate. If they are included in a future consolidation the interest rate will be the weighted average of all the loans being consolidated rounded to the nearest one-eighth of one percent.
Should I consolidate? This is a question only you can answer। Different people have different comfort levels when it comes to consolidation. Ultimately you will have to make the decision as to what will work best for you. Points to consider:
The interest rate on Stafford loans disbursed on or after July 1, 2006 is fixed so there will probably not be a need to consolidate these new loans.
Stafford loans that you have not yet consolidated that were disbursed between July 1, 1998 and June 30, 2006 are accruing interest at a 6.54% variable rate. This rate will increase to 7.14% variable once your loans enter repayment. If you consolidate while your loans are in grace you can secure the 6.54% interest rate.
Compare current rates to the maximum rate of 8.25% when considering whether you should consolidate your variable rate loans.
The rates have been lower in the past and could return to lower levels in the future but we cannot predict when that will happen.
Consolidation can provide you with one single lender for all your Federal loans, if you have multiple lenders.
What if I only have loans disbursed after July 1, 2006. Should I consolidate? One primary advantage of consolidation is the ability to secure a low fixed interest rate. Since all Stafford loans disbursed after July 1, 2006 have a fixed interest rate there does not appear to be much reason to consolidate these new loans at this time.
When should I consolidate, if I am going to do it? As of July 1, 2006 you can no longer consolidate your Federal loans while you are in school. You are only able to consolidate your loans while you are in grace, repayment, deferment or default status. You may receive a 0.6% lower interest rate if you are consolidating variable rate Stafford loans during your 6 month grace period. Please refer to the question Can I consolidate my loans during the 6 month grace period after graduation below for details.
Can I consolidate my loans during the 6 month grace period after graduation? Yes. The advantage is you will receive a 0.6% lower interest rate if you are consolidating variable rate loans. Stafford loans that you have not yet consolidated, that were disbursed between July 1, 1998 and June 30, 2006, are accruing interest at a 6.54% variable rate. This rate will increase to 7.14% once your loans enter repayment (after your 6 month grace period). If you consolidate while your loans are in grace you can secure the 6.54% interest rate. However, once grace status loans are consolidated you will lose any remaining grace period. Your first payment will be due once the consolidation is finalized in approximately 30 – 60 days. Keep in mind that all of the variable rate loans change interest rates every July 1. Notification of this rate change is made in June, so May graduates can determine when the best time to consolidate their variable loans might be – before July 1 or after.
What is the downside? Anything I should be worried about? There are three areas in which you should pay special attention:
1. Interest rate: It could go down in future years for your variable, non-consolidated loans। Therefore, you could consolidate at the current rate, thinking you got a terrific deal, and then the rates may go down even further। Conversely, you may decide to wait and potentially be disappointed with an increase in the interest rates।
2. Lost Incentives: We know many of you are being encouraged by various lenders to consolidate with them, even though you may not have a loan with them. The University of Michigan is a direct lending school. If you have borrowed Federal Stafford loans while attending here then your loans are serviced by Direct Loans. There is a 3% origination fee on these Federal Stafford loans. Currently you pay 1.5% of the fee at disbursement. Due to an incentive offered by Direct Loans, you are not required to pay the other 1.5% of the fee unless you fail to make your first twelve consecutive payments on-time to Direct Loans. This means that if you choose to consolidate through a lender other than Direct Loans you will not benefit from this incentive and the remaining 1.5% of the fee will be added to your loan total. However, many lenders offer incentives that may counteract this additional fee, so research your options carefully.
3. If you consolidate during your grace period you will go into repayment once the consolidation is finalized (30-60 days) and forfeit the remainder of your grace period. Your grace period starts the day after you stop attending school or you drop below half-time enrollment. You don’t have to make payments during your grace period. If you have forfeited part of your grace period and cannot afford to make your loan payments you can request a deferment based on economic hardship/unemployment. The lender will determine whether you are eligible.
How do I consolidate through Direct Loans? You can complete your consolidation on-line with Direct Loans at: http://loanconsolidation.ed.gov/borrower/bapply.shtml or by calling 800-557-7392. If you have other graduate or undergraduate Federal loans that are not serviced by Direct Loans you may be able to consolidate them through Direct Loans if you have at least one direct loan. However there may be reasons that this may not be advantageous for you. Please contact each of your respective lenders to compare relative strengths and weaknesses of each consolidator to ensure that incentives or benefits won't be lost.
Where do I go if I still have questions: Direct Loans or your other lenders are your best source of information. Direct Loans has additional information on-line at: http://loanconsolidation.ed.gov/borrower/borrower.shtml.
