Paul — who recently shared tips on socially responsible investments and on cheap world travel — is a financial aid counselor at the University of Oregon. He’s offered to share a presentation he’s been giving to students about loan consolidation. Recent grads who have unconsolidated federal student loans may also find this useful.

This information may make your eyes glaze now, but if you act on it, you can save yourself thousands of dollars in years to come.


There’s a lot of information on the web about student loan consolidation. Too much information. Many people are worried about the validity of the information they find. This primer is meant to give a basic understanding of the process so that students can make informed decisions in a timely fashion.

On 01 July 2006, the variable rate on current federal Stafford Loans is scheduled to increase by 1.84%. The current interest rate for federal Stafford Loans held by students that are “in-school” or in their grace period is 4.70%. The rate is 5.30% for former students. Based on a recent change to rules concerning the federal Stafford Loan program, new loans will be fixed at 6.80%.

The process of Federal Student Loan Consolidation allows holders of eligible federal loans to establish a fixed interest rate for their loans. The calculation of that fixed interest rate is based on a weighted average of the interest rates of the loans to be consolidated up to the next 1/8%. With the upcoming rate increase, it may be federal loan holder’s best interest to consolidate loans.

Federal Student Loan Consolidation must be completed no later than 30 June 2006 in order to lock in a fixed interest rate for federal student loans.

Students must identify the TYPE, AMOUNT, INTEREST RATE and LENDER INFORMATION for each their federal student loans. Lender information is used by the consolidation company to send payment and is required as part of the consolidation process. By accessing the National Student Loan Data System with a federal PIN (the same number used to complete the Free Application for Federal Student Aid online), students can find the type, amount, and lender information for each of their federal student loans. The lender will provide the interest rate for the loans they hold. Students may have multiple lenders.

The Federal Student Loan Consolidation Application is very similar regardless of the lender a student chooses. A student will need to:

  • Provide personal information.
  • Provide two references (these are not co-signers nor are they called for purposes of loan consolidation approval).
  • List the Type, Amount, Interest Rate and Lender Information for each federal student loan.
  • Indicate a repayment option. Repayment will begin 60 days after the loan consolidation process has been completed. Four options exist:
    • Standard — the most aggressive of 10 years or less.
    • Extended — 15 or more years
    • Graduated — 15 or more years, payments are lower in the first 3 years and gradually increase in 3 year increments
    • Income Contingent — 25 years, payments are based on a percentage of your income.
  • Sign the Promissory Note

Students that are still “in-school” should immediately obtain an IN-SCHOOL DEFERMENT form from the lender after the consolidation process is complete, so that their consolidated loan repayment does not begin. This deferment will last as long as they continue to be enrolled at least half-time in an accredited school.

Graduates who cannot afford the Standard repayment plan may opt to change their plan to match what they can afford after the loan consolidation process is complete. In the future, it may be in their best interest to change the repayment plan again once they can afford higher monthly payments. A consolidated student loan can be deferred once a loan holder again becomes enrolled at least half-time in an accredited higher education institution.

In some cases, the grace period of the federal student loan that was available prior to the loan consolidation process will be lost due the terms and conditions of the promissory note of a federally consolidated loan. This should not deter people from completing the loan consolidation process. It may factor into which federal loans they choose to consolidate. For example, the Federal Perkins Loan has a nine-month grace period before repayment begins.

Federal Student Loan Consolidation lender options include:

U.S. Department of Education
Strengths: Straightforward information about the benefits and incentives of consolidating with them. The Grace Period associated with the Stafford Loan program may be maintained. They will not sell your loan to another party after consolidation. A large list of deferment options.
Weakness: Only one incentive to lower the interest rate of the consolidated loan: 0.25% reduction of fixed interest of consolidated loan for enrolling in Automatic Monthly Payments.

Multiple FFEL Lenders
(i.e. Citibank, Nelnet, Great Lakes Educational Loan Services)
Strengths:Higher incentive for enrolling Automatic Monthly Payments. Incentive for making a number of on-time monthly payments.
Weakness: The consolidated loan could be sold to another FFEL Lender that does not provide the same incentives. The rules to obtain the incentives may make it hard for a student to maintain eligibility for the incentives.

You can learn more about student loan consolidation from the following sources:

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