Federal Student Loan Consolidation Made Easy

Federal Loan Consolidation Programs

Consolidating student loans is not difficult. The idea of how to consolidate student loans is easy to follow. There are two Federal Student Loan Consolidation programs in the United States that allow a student to consolidate all Direct Student Loans into one single loan:

The Federal Family Education Loan Program
Federal Direct Student Loan Program

The above two Student Loan Consolidation Programs were established to address the following loan types:

Stafford Loans
PLUS Loans
Perkins Loans

The offer of fixed interest rate for the whole loan life cycle is one key characteristic of a Federal Student Consolidation Loan.

A Brief History of the Federal Program

The Federal Student Loan Consolidation Program was created in 1986 to allow graduates with more than one Federal Student Loan to consolidate them all into one single loan package. Such consolidated loans had a variable interest rate from 1986 to 1998 but in 1998, the US Congress acted to convert the variable rate to one of a fixed rate weighted average. The latter came into force on February 1, 1999. Before this time, a Consolidated Federal Student Loan used to have a variable rate. That rate was determined by either the university or the lender, whoever is the loan originator.

In 2005, the Government Accountability Office (GAO) stepped in, took under consideration the savings of consolidating all of the consolidation loans. On the basis of future variations in interest rates, loan volume, percent of defaults and cost estimates from the Department of Education, GAO concluded that this would cost an additional $46 million. GAO also concluded that this cost would be offset by a savings of $3,100 million which was in part by avoiding a $2,500 million cost in subsidies.

Interest Implications

When compared with Federal Student Loan, the term of payment for Federal Consolidation Loans is longer. It can range anything from ten to thirty years. Even though monthly repayments are lower, the overall cost of the term of the loan is actually higher than with other federal student loans.

The fixed interest rate is derived from using a weighted average of the consolidated Federal Student Loan interest rates. This is done by assigning relative weights according to the amounts borrowed and then rounded up to the nearest 0.125%, but capped at 8.25% interest. Post-graduation grace periods and special forgiveness circumstances are two features of the original loans that have not been carried over to the consolidation loans.

In closing, consolidating student loans can be straightforward but it is important to appreciate the fact that Federal Student Loan Consolidation is not always suitable for every borrower of Direct Student Loans.