Frequently Asked Questions about Consolidation

The following is a list of common questions about student loan consolidation. These are genericized versions of actual questions received through FinAid's free Ask the Aid Advisor service.


Are there any minimum balances required to consolidate?

Some lenders require a minimum balance before they will accept a consolidation loan. Typically this is $7,500, although some lenders will allow you to consolidate with only $5,000 in loans, and the Federal Direct Consolidation Loan Program does not have a minimum balance.

Does consolidation affect my credit rating?

No. Education debt is considered "good debt", as it represents an investment that generally increases your ability to earn money to repay debt. Even though consolidation may increase the term of the loan, it does not appreciably change repayment behavior. (Defaulting on your education loans, on the other hand, will negatively impact your credit rating.)

How do I go about consolidating my loans?

Although the repeal of the single holder rule means that you can consolidate with any lender, it's generally a good idea to talk first with the current holder of your loans. They have all the paperwork, so the process is often simpler with the current holder of your loans. This establishes a baseline against which you'll compare other lenders. Another lender may offer better customer service or loan discounts that make it easier to repay your loans. (Note that completing a consolidation loan application takes only about half an hour, so the paperwork burden is minimal even if you use another lender.)

Until you receive notification that the consolidator has paid off your original loans, continue making payments on those loans. You don't want to go into default on those loans, since that would prevent your consolidation loan application from moving forward.

Are there any ways to save money through consolidation?

It can pay to shop around. Although federal law sets the rates on student loans, those rates are the maximum rates. Nothing prevents a lender from charging lower rates. Many lenders offer loan discounts for having your monthly loan payments direct debited from your bank account (e.g., 0.25% interest rate reduction). They may also offer an interest rate reduction for making on-time monthly payments (e.g., 1% interest rate reduction after 36 months of on-time payments for as long as you continue making on-time payments).

Note, however, that if you are late with a single monthly payment, you lose the interest rate reduction permanently. Less than 10% of borrowers succeed in obtaining the full benefit of an on-time payment discount. (Even borrowers who sign up for automatic direct debit of the monthly payments can miss a payment if they have insufficient funds in their account.)

We recommend focusing on the discounts that you can't lose, such as discounts for signing up for direct debit of the monthly payments. Next look for discounts that are more immediate in nature, such as those that offer a reduction in principal or a rebate of the loan fees. When a repayment incentive requires on-time payments, prefer those that involve a shorter time period before you can qualify for the discount. A discount that is suspended for a short time period after you are late with a payment is better than one that terminates after a single late payment.

Call your lender to ask about their consolidation loan programs and any special discounts. Then shop around by calling other lenders. The FinAid site includes a large list of student loan providers, many of whom offer student loan consolidation.


Can parents consolidate PLUS loans? Should they?

Yes, parents can and should consolidate PLUS loans. Consolidating a PLUS loan can yield some savings, since it reduces the interest rate from 8.5% to 8.25% due to the cap on the interest rates of consolidation loans.

I have just one loan. Can I consolidate?

Yes, so long as the loan being consolidated is not itself a consolidation loan. To reconsolidate a consolidation loan, you must be including additional loans. Otherwise, you can consolidate even just a single loan.

I consolidated a few years ago. Can I consolidate again?

Consolidation loans may only be reconsolidated when you are adding more loans to the consolidation. If you do not have other federal education loans to include in the new consolidation loan, you cannot reconsolidate a consolidation loan. Note that reconsolidating a consolidation loan does not relock the interest rates on the loan.

I have not yet graduated. Can I consolidate my loans?

No. The early repayment status loophole was repealed, effective July 1, 2006. In addition, the ability of Direct Loan borrowers to consolidate during the in-school period was also repealed on this date. You can only consolidate during the grace period or after your loans enter repayment. (If you drop below half time enrollment status, your loans will be eligible for consolidation. Summer enrollment and accelerated programs, however, generally do not qualify you to consolidate your student loans.)

I qualified for a 2.25% discount on my unconsolidated Stafford loans (i.e., 0.25% interest rate reduction for direct debit and 2% interest rate reduction after 48 months of on-time payment). If I consolidate, will I lose these benefits? Is it still worthwhile to consolidate?

A consolidation loan is like a refinance. It is a new loan that pays off the original loans. If you consolidate your loans, you will lose any existing loan discounts, especially if you change lenders.

To determine whether it is worthwhile to consolidate, you need to compare the value of the loan discounts you will get if you consolidate with the value of the loan discounts you retain if you don't consolidate.

If you have loans with Direct Lending, you may have to repay the 1.5% rebate you obtained from Direct Lending if you consolidate with the FFEL (bank-based) consolidation loan program.

I don't remember who my lender is. Help!

The financial aid administrator at your college may be able to help. You can also look up your lender online. See FinAid's Lost Lender for information about the National Student Clearinghouse's Loan Locator service and the NSLDS Student Access.

Can I consolidate private education loans? Can I consolidate my Federal and private loans together?

You cannot consolidate private education loans into the Federal consolidation loan program. However, some lenders offer private consolidation loans for those loans. We do not recommend including federal education loans in a private consolidation loan, as this often increases the interest rate. You will also lose several important benefits of the federal education loans, such as flexible repayment terms and generous loan forgiveness and cancellation provisions. Consolidate your federal loans separately, with the federal consolidation loan program.