Sigma Pi Fraternity International

What is loan consolidation?

A Consolidation loan is a practical, student debt management tool that enables you to bundle all of the federal loans you received to finance your college education into a single loan. Consolidation loans are readily available from education loan lenders and loan holders, including Sallie Mae, which offers the SMART LOAN Consolidation Account.

When your Consolidation loan is issued, your lender pays off the outstanding balances of all the loans you put in the consolidation. In essence, you refinance your education debts.

In addition to simplifying record-keeping and check-writing chores, consolidation can significantly reduce your monthly payment burden-by up to 58 percent or more! That's because consolidation allows you to stretch your repayment period from the standard 10 years to up to 30 years, depending on the amount of your education debts. The lower payment means you'll have more money available to meet other household expenses, including car payments, childcare, and career-related necessities.

Consolidation also allows you to convert multiple variable-rate education loans into a single loan with an interest rate that is fixed for the life of the loan.

Extending the repayment period increases your total interest payments, because you'll be making smaller payments over a longer period of time. There also are no prepayment penalties for accelerating the payback of your Consolidation Loan.

How long does it take to get a Consolidation loan?

The typical processing time for a Consolidation loan is four to eight weeks, although many loans can be completed in only two to three weeks. Until your loan is processed, you should continue to make payments on your existing loans if you are not in deferment/forbearance or the post-school grace period. The first payment on your Consolidation loan is due within 60 days of the disbursement of the loan.

How is the interest rate on a Consolidation loan set?

The Consolidation loan has a fixed interest rate, based on the weighted average of the interest rates of the loans being consolidated, excluding Health Education Assistance Loans (HEAL), rounded up to the nearest 1/8th percent or 8.25 percent, whichever is less. The weighted-average rate calculation is based on the official interest rates for the loans being consolidated, exclusive of any borrower benefit or other rate special rate discounts.

Why should I consolidate my education loans?

Consolidation allows you to lower your monthly payment by lengthening the repayment period beyond the standard 10-year payback schedule. Depending on the amount of your education debts, you can extend your payback period up to 30 years and significantly reduce your monthly payment. However, be aware that extending the term of your loan will increase your total interest costs, so you should explore your options.

Benefits:

• If your loans are with different lenders or loan servicers, loan consolidation will eliminate the need to make multiple monthly payments. You will have only one check to write each month!
• Stafford subsidized and unsubsidized loans carry a variable interest rate that is adjusted annually. Consolidation loans carry rates that are fixed for the life of the loan.
• For borrowers submitting a consolidation application during their grace period, the interest rate for the Consolidation loan will be based on the in-grace rate, which can be up to .6 percent lower than the interest rate during repayment for Stafford loans first disbursed on or after July 1, 1995. Thus, consolidating in grace can significantly reduce interest costs.
• By consolidating during the grace period, borrowers will give up any remaining portion of their grace period. However, borrowers seeking to consolidate their loans with Sallie Mae can submit their applications during the grace period and request that the processing of their loans be completed just prior to the end of grace. To make the request, follow our special instructions for in-grace consolidation.
• Under a consolidation loan the federal government will continue to honor interest subsidy benefits for any subsidized FFELP or subsidized direct loans included in a Consolidation loan.

Why should I consider consolidating my loans?

• You're struggling to make ends meet. If you're having trouble covering all your regular household expenses, including your rent or mortgage payments, car loan installments, food bills, and utility payments, consolidating your student loans may help ease the pressure on your monthly budget. Consolidation can reduce your monthly payment amount by about 10 to 40 percent-or more—depending on your loan balance, the length of the payback period, and the interest rate on your Consolidation loan.
• Your credit cards are carrying big balances. You can save money by paying off your credit card balances sooner, even if it means taking longer to pay back your student loan. Your credit card issuer could be charging interest at an annual rate of 18 to 22 percent. That's more than twice the rate charged on your student loans. In addition, federal law now permits many borrowers to deduct up to $2,500 a year in interest paid during the repayment of education loans. Interest on personal credit card balances is not tax deductible. What's more, credit cards are a source of instant credit that can be a lifesaver during financial emergencies, so you should avoid maxed-out plastic.
• Your income tends to fluctuate. If you're paid on a commission basis, you might need the safety net provided by a long-term repayment plan.
• You have another worthwhile use for the money. A smaller payment on your student loans may be necessary if you're trying to get a home mortgage, save the seed capital needed to start a small business, or help a family member go to college.

Are there any disadvantages to loan consolidation?

Consolidation can significantly increase your total interest costs, because you'll be making smaller installments over a longer period of time. Depending on the loan balance and interest rate, consolidation can double or triple your total interest expenses. It is advisable to accelerate payments whenever possible.

Can I get forbearance for a Consolidation loan?

Yes. Consolidation loan borrowers remain eligible for all types of forbearances currently available under the Stafford and PLUS loan programs. In granting a forbearance, a lender may permit a temporary cessation of payments, temporarily reduce the amount of the monthly payments, or extend the repayment period. Find out if a forbearance is right for you.

What is the interest rate charged on a Consolidation loan during a period of deferment or forbearance?
The rate charged on a Consolidation loan during a period of deferment or forbearance remains the same as the interest rate charged during repayment.

What loans cannot be consolidated?

You may not include private loans you received from banks, credit unions, thrift institutions (savings and loan associations), your parents, or other individuals. Loans issued by colleges also are not eligible. You cannot use Consolidation loans to finance other types of personal debt, including credit card balances and car loans.

Do Consolidation loans require a minimum balance or number of loans?

No. Federal rules do not stipulate a minimum loan amount, but some lenders may require a minimum balance. In addition, there is no limit on the number of loans that may be consolidated. In fact, you may consolidate just one loan. For instance, if your only federal education loan is a $15,000 unsubsidized Federal Stafford loan that you used to finance your master's degree, you can arrange a Consolidation loan to extend your repayment period for this loan from the standard 10 years to 15 years.

Can I consolidate my subsidized loans with my unsubsidized loans?

Yes. A Consolidation loan may include both subsidized and unsubsidized Stafford loans or a mix of subsidized Stafford loans and other federal education loans. Borrowers may retain interest subsidy benefits for subsidized Stafford loans that are mixed with unsubsidized Stafford loans or other federal education loans. This means the federal government will pay the interest that accrues on the subsidized Stafford portion of a Consolidation loan during authorized periods of deferment. You may obtain a deferment, for example, if you return to school on at least a half-time basis, become unemployed, or suffer other economic hardship. However, under current rules, borrowers will not retain the interest subsidy for any Federal Perkins loans if these loans are included in a new Consolidation loan.

Tip: If you want to preserve the subsidy benefits of existing Federal Perkins loans, you should not consolidate these loans in a new Consolidation loan.

Can I add loans to a Consolidation loan after it has been issued?

Yes. You can add one or more eligible existing or new loans to the consolidation no later then 180 days following the issue date of the Consolidation loan.

In addition, you may also reconsolidate your existing consolidation loan with any eligible loans that were left out of the earlier consolidation.

Additional Resources

For more information on student loan consolidation please visit Sallie Mae.

Sigma Pi would like to thank Sallie Mae for providing the information used in the creation of this webpage.