Consolidation Programs

Loan consolidation programs are offered by lenders, loan servicers and by the Federal government. Programs allow you to consolidate the following types of loans into one new large loan.
Federal Stafford and/or Federal Direct Loans
Federal Perkins Loans
Health and Human Services Loans (except Primary Care Loans)
Virtually all medical students receive a Direct Loan or a Stafford Loan as part of their financial aid award. Many students also received a Stafford Loan or a Federal Direct Loan during undergraduate school. Some students receive other loans, including Federal Perkins Loans or loans through the Department of Health and Human Services (e.g. Loans for Disadvantaged Students). While the interest rate on Perkins and HHS loans is fixed, the interest rate on Federal Stafford Loans and Federal Direct Loans is variable and is set each spring for the period July 1 through June 30.
The interest rate for a Consolidation loan is set at a weighted average rate of the loans being consolidated, rounded up to the nearest 1/8th of a percent, not to exceed 8.25%.
There are pros, cons, and other considerations pertaining to loan consolidation. You need to research the program carefully. Think about your own particular situation, which may be different from your friend’s situation or the “typical” student mentioned in many bank publications. Every borrower is unique.
If you are thinking about consolidating with an agency or servicer you haven’t used before, gather information carefully! When talking with the agency’s “rep,” have all your “antennas out.” Is the person easy to reach? Are they knowledgeable? Do they “tune into” your particular situation?
Please note that repayment benefits can vary from lender to lender. Thus, if you want to compare specific options, you should visit the web site for your particular lender, although the site might appear to be more “sales” oriented.
We have listed some of the pros, cons, and other considerations to think about as you decide whether or not consolidation is the right choice for you to make.
Interest Rate
Your Consolidation loan will have a fixed rate of interest, based on the underlying loans you include in the Consolidation loan, rounded up to the nearest 1/8th of a percent subject to a cap of 8.25%.
Once you lock in a fixed rate on a Consolidation loan, you cannot take advantage of any subsequent decline in interest rates for variable rate Stafford/Direct Loans. Thus, if at the next interest rate adjustment on July, rates are slated to drop below the rates currently in effect, the rate on your Consolidation loan will remain unchanged. Of course, if interest rates rise above current levels and you did not consolidate before July 1, you will have lost the opportunity to “lock in” today’s low rates.
Convenience
You can consolidate your separate federal loan payments into one monthly payment. Many borrowers believe this greatly facilitates the student loan repayment process.
Non-federal loans, such as University loans or private alternative loans cannot be included in a Consolidation loan. Federal Perkins and Health and Human Services (HHS) loans* have a 5% fixed rate interest and generally have more generous deferment options than Stafford/Direct Loans. You also lose your in-school interest subsidy, so if you were thinking about returning to school, you would definitely not want to include these in a Consolidation loan. Regarding the interest rate, some borrowers believe the convenience of a single payment outweighs the slightly lower interest rate on certain loans.
*HHS loans include Primary Care Loan (PCL), and Loans for Disadvantaged Students (LDS)
Borrower Benefits
Some of the consolidation lenders/servicers offer a 1-2% discount on your loan once you make a certain number of payments “on time,” usually within 10 or 15 days of the due date. Most also offer a reduction in interest if you agree to make electronic payments directly from your checking or savings account.
Note: borrower benefits are not included in the loan promissory note and cannot be guaranteed into the future.
Financial Implications
Pros: As shown in the chart below, your monthly repayments can be substantially lower with a Consolidation loan that extends the repayment period beyond the standard 10 years. This, of course, increases your monthly cash flow. However, wWhen you extend the repayment period, your interest payments and thus your total payments will be higher. For example, under the 10-year plan, if you borrowed $80,000, you’ll pay $37,746 in interest. However, if you take 30 years to repay, you’ll pay $92,570 in interest, a difference of $54,924!
You can solve this problem by signing up for a shorter repayment period or by prepaying your loan principal by adding an additional amount to your monthly payment. The latter approach gives you the best of both worlds. You’ll enjoy the benefits of a single monthly payment that is lower than the combined payments on your unconsolidated loans, plus you can prepay some of your principal whenever you have the extra funds to do so. Since you can repay your federal loans at any time (consolidation or otherwise) without penalty, you can control the length of your repayment period and the total amount of interest you pay over the life of your loan.