A Federal Consolidation Loan allows students and parents to refinance their existing federal education loan debt into one new low fixed interest rate loan. In addition to the low interest rate, when you consolidate through ELF you have the option of lowering your monthly payment by extending your payment term without any prepayment penalty.

What are the eligibility requirements to consolidate my federal student loans?

The following outlines some of the basic eligibility criteria to qualify for a Federal Student Loan Consolidation through ELF:

• All loans to be included in the consolidation must be in a grace period or repayment status (including loans in a deferment or forbearance status).
• Loans in a default status are NOT eligible for consolidation
• Loans in an in-school status are NOT eligible for consolidation
• The total combined balance of all eligible federal student loans to be included in the consolidation must be at least $25,000.

When can I consolidate?

Borrowers are eligible for federal student loan consolidation when all of the loans selected for consolidation are in a grace period or in repayment status (including loans in deferment or forbearance).

What loans are eligible for consolidation?

The following loan types are eligible for consolidation:

• FFEL Subsidized and Unsubsidized Stafford Loans (SS/US)
• Direct Subsidized and Unsubsidized Stafford Loans (DSS/DUS)
• FFEL PLUS Loans
• Direct PLUS Loans
• Graduate PLUS Loans
• FFEL Consolidation Loans
• Direct Consolidation Loans (Variable and Fixed)
• Federal Perkins Loans
• Supplemental Loans for Students (SLS)
• Health Professions Student Loans (HPSL)
• Federal Nursing Loans
• Federal Insured Student Loans (FISL)
• Guaranteed Student Loans (GSL)

How is the interest rate determined?

The interest rate on a Federal Consolidation Loan is set by calculating the weighted average of the existing loans being consolidated rounded up to the nearest one-eighth percent, not to exceed 8.25%. The loan carries a fixed interest rate for the life of the loan.

Can I consolidate my private and federal student loans together?

No. We cannot consolidate your private and federal student loans together. Federally-backed student loans carry certain benefits that private student loans do not. Most of the federal benefits that come along with your federal student loans would be lost if they were combined with your private student loans.

You can still consolidate both your private student loans and your federal student loans separately. And with the help of our highly trained loan consultants, we can make the process quick and simple for you.

I am currently in deferment/forbearance, am I still eligible to consolidate?

Even if you are currently delaying your payments, you may still be eligible to consolidate.

What will be the length of my repayment term?

The length of your repayment term is based on guidelines established by the federal government. The repayment term is based on the total balance of your student loans to be consolidated not to exceed the maximum term allowed (30 years).

Am I obligated to extend my repayment term?

No. Federal statute sets your repayment term based on your total balance consolidated. You can shorten your term to any length you choose. At least initially, most borrowers go with the longest repayment term option to create a safety net in case any unexpected financial needs arise. Of course there are no pre-payment penalties so you can pay the loan off as quickly as you are able.

Are there different types of repayment plans?

There are a few options to choose from:

• Standard Repayment – A level repayment option wherein the payment amount remains the same throughout the entire life of the loan.
• Graduated Repayment – This repayment plan supplies you with the lowest monthly payment to start, and gradually increases over time.
• Extended Repayment – If your balance falls between $30,000 and $39,999 you are able to extend your term an additional 5 years (from 20 to 25 years). This option can be used with the standard or graduated payment plan.

• All loans to be included in the consolidation must be in a grace period or repayment status (including loans in a deferment or forbearance status).’
• Loans in a default status are NOT eligible for consolidation
• Loansin an in-school status are NOT eligible for consolidation
• The total combined balance of all eligible federal student loans to be included in the consolidation must be at least $25,000.

The following loan types are eligible for consolidation:

• FFEL Subsidized and Unsubsidized Stafford Loans (SS/US)
• Direct Subsidized and Unsubsidized Stafford Loans (DSS/DUS)
• FFEL PLUS Loans
• Direct PLUS Loans
• Graduate PLUS Loans
• FFEL Consolidation Loans
• Direct Consolidation Loans (Variable and Fixed)
• Federal Perkins Loans
• Supplemental Loans for Students (SLS)
• Health Professions Student Loans (HPSL)
• Federal Nursing Loans
• Federal Insured Student Loans (FISL)
• Guaranteed Student Loans (GSL)

Despite the switch to fixed interest rates on Stafford and PLUS loans eliminating a key financial incentive to consolidate, there are still several reasons to consolidate your education loans. These include having a single monthly payment, access to alternate repayment plans, the PLUS loan interest rate loophole, and the ability to reset the 3-year clock on deferments and forbearances. But consolidation can cut short the grace period, although the grace period loophole can work around this problem. It is best to avoid consolidating Perkins loans, because you lose several valuable benefits. Beware of extending the term of your loan, as this can increase the total interest paid over the lifetime of the loan; you can stick with standard ten-year repayment.

Before consolidating, always evaluate the benefits provided by the current holder of your loans. The loan discounts offered by originating lenders tend to be superior to those offered by consolidating lenders, since consolidation loans have tighter margins. Also, if you received a fee waiver or rebate from the originating lender, you may have to repay that discount if you consolidate with another lender. It may be possible to get some of the benefits of alternate repayment plans without consolidating, such as extended/graduated repayment with a loan term of up to 25 years and a single monthly payment, if you have more than $30,000 in federal education loan debt accumulated since October 7, 1998 with the lender. (This is due to a little known provision of the Higher Education Act, in section 428(b)(9)(A)(iv), and the regulations at 34 CFR 682.209(a)(6)(ix).)

You can change the repayment schedule on your loan once per year. So consider starting off with standard ten-year repayment on your consolidation loan. You are not required to start off with extended repayment. If you find it difficult to afford the payments, you can always switch to extended repayment later.

Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased.

In certain circumstances (for example, when one or more of the loans was being repaid in less than 10 years because of minimum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total amount of interest paid will decrease.

You do not need to pick an alternate repayment plan. We recommend sticking with standard ten-year repayment, because it will save you money. The alternate repayment plans may have lower monthly payments, but this increases the term of the loan and the total interest paid over the lifetime of the loan. See our caveat about extended repayment below.

Repayment on a consolidation loan will begin within 60 days of disbursement of the loan, unless the borrower qualifies for an deferment or forbearance.

Federal education loans, including consolidation loans, do not have a prepayment penalty. So you can pay off all or part of your federal education loans without incurring a penalty. If you want to take advantage of this, be sure to include a letter with the extra payment indicating that it should be applied to reducing your principal. Otherwise, the lender may treat it as an advance payment of the next month’s monthly payment.

You can consolidate a consolidation loan only once. In order to reconsolidate an existing consolidation loan, you must add loans that were not previously consolidated to the consolidation loan. You can also consolidate two consolidation loans together. But you cannot consolidate a single consolidation loan by itself. These restrictions have been in effect since early 2006.

Note that when you reconsolidate a consolidation loan, it does not relock the rates on the consolidation loan. The consolidation loan is treated as a fixed rate loan within the weighted average interest rate formula used to calculate the interest rate on the new consolidation loan. Consolidation does not pierce the veil on previous consolidations.

The new restrictions on consolidating a consolidation loan limit your ability to use consolidation to switch lenders. Generally, you will consolidate your loans once, toward the end of the grace period or after the loans enter repayment, and then be locked into that lender for the lifetime of the loan. If you want to preserve your ability to use consolidation in the future to switch lenders, you should exclude one of your loans from the consolidation.

Most lenders require a minimum balance before they will consolidate your loans. For example, many lenders will only offer consolidation loans for borrowers with loan balances of at least $7,500. A few lenders will offer consolidation loans for balances of $5,000 or more, and the Federal Direct Consolidation Loan program has no minimum balance for consolidation loans. (Lenders may not discriminate against borrowers who seek consolidation loans on the basis of number/type of student loans, type/category of educational institution, the interest rate on the loans, or the type of repayment schedule sought by the borrower. Lenders are, however, able to discriminate on the basis of the amount of the loans being consolidated, so lenders can set a minimum balance on the loans.)

Married students are no longer able to consolidate their loans together. This provision was repealed effective July 1, 2006. When married students consolidated their loans together, each spouse became responsible for the full amount of the loan, and the loans could not be separated if the couple got divorced. To avoid such problems in the future, Congress decided to repeal this provision as part of the Higher Education Reconciliation Act of 2005.

Students can only consolidate their education loans during the grace period or after the loans enter repayment. (Loans that are in default but with satisfactory repayment arrangements may also be consolidated.) Students can no longer consolidate while they are still in school. (The early repayment status loophole and the ability of Direct Loan borrowers to consolidate during the in-school period was repealed as part of the Higher Education Reconciliation Act of 2005, effective July 1, 2006.)

Parents, however, can consolidate PLUS loans at any time.

For example, suppose a student has just unsubsidized Stafford Loans originated on or after July 1, 2006. These loans have a fixed interest rate of 6.8%. When they are consolidated by themselves, the consolidation loan will have an interest rate of 6 and 7/8ths of a percent, or 6.875%. So the interest rate increases only slightly.

If the borrower has a mix of loans with different interest rates, the weighted average will be somewhere in between. For example, if the borrower has $5,000 of Perkins Loans (at 5.0%) and $10,000 of unsubsidized Stafford Loans (at 6.8%), the weighted average is

    $5,000 * 5.0% + $10,000 * 6.8%
    ------------------------------ = 6.2%
	   $5,000 + $10,000

This weighted average, 6.2%, is then rounded up to the nearest 1/8th of a percent, yielding a consolidation loan interest rate of 6.25%.

Note that the weighted average does not fundamentally alter the underlying cost of the loan. It preserves the cost structure by including each interest rate to the extent that it applies to part of the overall loan balance. For example, the consolidation loan in the previous paragraph says that of the $15,000 consolidation loan balance, $5,000 will be at 5.0% and $10,000 at 6.8%, yielding an equivalent interest rate of 6.2%.

If you are consolidating loans with different interest rates, the weighted average interest rate will always be in between. Don’t be fooled if someone tries to suggest that this will save you money by getting you a lower interest rate. The interest rate may be lower than the highest of your interest rates, but it is also higher than the lowest of your interest rates. More importantly, the amount of interest you pay over the lifetime of the loan will be about the same.

(For the mathematically inclined, there is a slight difference due to the different shapes of amortization curves at each interest rate. In the example given above on a 10 year term, $10,000 at 6.8% has a monthly payment of $115.08 and total interest paid of $3,809.66, $5,000 at 5.0% has a monthly payment of $53.03 and total interest paid of $1,364.03. If you add these, you obtain a total monthly payment of $168.11 and a total interest paid of $5,173.69. Using the weighted average, $15,000 at 6.2% has a monthly payment of $168.04 and a total interest paid of $5,165.01. So using a weighted average yields a very small reduction in the monthly payment (in this case, 7 cents) and in the total interest paid ($8.68) due to a kind of triangle law. Of course, when you consolidate the interest rate is rounded up to the nearest 1/8th of a point, so $15,000 at 6.25% has monthly payments of $168.42 and total interest of $5,210.42, yielding a slight increase. So you pay a tiny bit of a premium for consolidation, due to the rounding up of the interest rate.

The PLUS loan interest rate loophole can reduce the interest rate on 8.5% fixed rate PLUS loans by 0.25% through consolidation.

If you were deferring the interest on an unsubsidized Stafford Loan by capitalizing it, most lenders will add the capitalized interest to principal when you consolidate. (Lenders can capitalize interest at most quarterly, but most capitalize it once when the loans enter repayment or at other loan status changes.)

A separate page provides a comparison chart of consolidation loan discounts.

So is consolidation right for you? Each person’s financial situation is different so it’s not a black or white answer. What I can tell you is this, if you are struggling with your monthly payment than consolidation will probably serve you well.

We’ve actually seen a spike in consolidation applications over the past month which is reflection on the current state of the economy. Many don’t have jobs or are only working part-time right now and need to lower their monthly payment. The job market is the worst it’s been in years. According to the Labor Department the unemployment rate just jumped to 6.1% the highest in 5 years. Over 600,000 jobs have been lost so far in 2008! I guess we should just be thankful we are in a recession and not a depression.

If you would like to find out what your interest rate and payment terms would be without obligation.