Student Loan Consolidation

Student Loan Consolidation

Student loan consolidation is an attractive option for many borrowers with defaulted loans. Obtaining a student loan consolidation allows the borrower to get a fresh start – renewing eligibility for new loans, grants, and even deferments. Consolidation also updates and improves the status of student loans on credit reports and eliminates the possibility of tax intercepts, wage garnishments, or other collection efforts.

Government student loan consolidation programs are especially helpful, because the borrower can choose from one of several income-based repayment plans.

Consolidation loans, as the name suggests, serve to combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. As of July 1, 2010, the Direct Loan consolidation program is the only government consolidation loan program still available. This means that FFEL consolidation loans are no longer available.

Some lenders offer consolidation loans to cover private education loans as well. However, that being said, it is very important to note that consolidating federal loans into a private consolidation loan will cause you to lose many of your rights under federal loan programs (including deferment, forbearance, cancellation, and affordable repayment rights). This is not to mention that a general rule, federal consolidation loans typically have lower interest rates than private loans.

How Do Federal Consolidation Loans Work?

Under Direct Consolidation, defaulted borrowers are afforded the opportunity to make 3 consecutive monthly payments. The payments must be made in accordance with the consolidation loan terms, although an interruption in this consecutive period is allowed in limited circumstances (i.e. for qualifying military service members or affected civilians).

If you have outstanding balances on Direct Loans, you are eligible for Direct Loan consolidation. You are also eligible if you have only FFEL loans as long as you meet one of the following two conditions: 1) You must be unable to obtain a FFEL Consolidation loan or 2) unable to obtain a FFEL Consolidation loan with acceptable income-sensitive repayment terms (these conditions should not be a problem since there is no longer a FFEL consolidation loan program as of July 1, 2010).

If you are in default and consolidating with Direct Loans, you must either make three reasonable and affordable payments or agree to repay using the Income Contingent Repayment Plan (ICRP) or the Income-Based Repayment Plan (IBR). Despite what a collector may tell you, if you select ICRP or IBR, you do not have to make three payments before applying for consolidation.

Before the Department will consolidate the loans, they will provide the borrower a summary sheet that lists all of the loans that will be included in the consolidation. It will also list the repayment plan that was selected by the borrower. The borrower should review this information carefully and contact the Department if there are any problems. If the Department is not notified of any mistakes within 10 days of the date of the letter, it will be assumed that the information is correct and the consolidation loan will be processed.

In most cases when you are consolidating your loans out of default, the lender will add debt collection costs to the new loan balance. This should be no more than 18.5% of the outstanding principal and interest.

If a borrower has already defaulted on a consolidation loan and now want to consolidate again, they will likely run into some problems. If a borrower has defaulted on a FFEL consolidation loan, they may attempt to consolidate with the Direct Loan program, but only if they select an Income-Based or Income-Contingent repayment plan. Military service-members can also seek to consolidate student loans with Direct Loans through the use of the public service forgiveness program or the limits on interest accrual program.

If a borrower has defaulted on a Direct consolidation loan, they cannot consolidate again with either program unless they are adding new loans to the consolidation. However, even where no new loans exist, borrowers may still seek student loan rehabilitation as a way out of their student loan debt issue.


If you would like a FREE consultation to learn more about how Graham & Borgese can help you with your student loans, contact us today.