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Federal Loan Consolidation combines multiple federal loans into one new consolidation loan. This allows you to simplify your repayment by having one lender and one payment. The new loan will have a fixed interest rate that is a weighted average of the interest rates on your loans rounded up to the nearest eighth of a percent, not to exceed 8.25%. In the past, consolidation was also a way to obtain a fixed interest rate; however, the interest rate on all Federal Stafford Loans is now fixed, so that is no longer an important consideration.
You can consolidate any federal loans (Stafford, Perkins, GradPLUS). You cannot consolidate Harvard loans or private loans (CitiAssist, MEFA, etc.). There are other factors though to keep in mind when deciding which loans to consolidate:
When thinking about consolidating your loans, there are a few primary details to consider.
Consolidation in general will not affect your LIPP eligibility, even if you consolidate undergraduate loans or loans from other degree programs. You should, however, keep a record of what loans you consolidate and the original amounts to submit with your first LIPP application.
The part of consolidation that could affect your LIPP eligibility has to do with the repayment options. For LIPP purposes, you want to choose a 10-year repayment schedule (in order to maximize your LIPP assistance). Most consolidation lenders should allow you to do this, but you may want to verify that this option is available before consolidating.
Depending on the timing of your consolidation, if you are losing part of your grace period, please remember that LIPP policy will cover you if you are both required to be making payments and in a LIPP-eligible position. Therefore, if you go into repayment in September and you are working in September, you can receive LIPP assistance. However, if you go into repayment in August but will not be working until September, LIPP will not cover you until September.
There are two main avenues through which to consolidate – the Direct Loan Program or the FFEL Program. The Direct Loan program is through the Department of Education, and the FFEL program can be through any other private lender. Consolidating with the Direct Loan program will guarantee that your loan will not be sold. The Direct Loan program also has a more generous income contingent plan if you plan on going into a low paying position that will not be eligible for LIPP.
The main benefit to consolidating through a FFELP lender is the repayment incentives (provided you are eligible and can achieve them), which may lead to a lower effective interest rate. There is, however, the possibility that your loan would be sold and the repayment incentives may not be honored with the new lender.
The new federal rules also changed the timing aspects of consolidation. You can no longer consolidate while you are in school; the first day you can consolidate is the day after the last day of classes. Be aware that you will go into repayment approximately 30-60 days after your consolidation is finalized. If you decide to consolidate, you may want to wait until closer to the end of your grace period. There are no longer reasons to rush to consolidate, so you can take your time making this decision at any point throughout the repayment of your loans.
There are some companies who offer private loan consolidation; however, the terms are generally less attractive than the terms you currently have on your loans. Private loan consolidation generally allows you to put your private loans together and extend your repayment period, thus lowering your monthly payment. Overall though, you will most likely be charged a higher interest rate and pay considerably more over the life of the loan.
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