There are two Federal Student Loan Consolidation Programs  in the United States that allow a student to consolidate all Student Loans into one single loan:

The Federal Family Education Loan Program

Federal Direct Student Loan Program

The above two 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 Consolidation Loans by federal government targeting at students.

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 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 Student Loan from federal government 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 Student Loans offered by federal government, 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 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.

Don’t Rush to Decide

If you have existing loans that cost you considerable money, despair not. Consolidating your loans may be the way to go. However, it is important to appreciate the fact that Federal Student Loan Consolidation is not always suitable for every borrower with Federal Student Loan Payment.

How do I know if I’m eligible?

Basically, if you’re a recent graduate, a borrower who is already paying back your loans, or a parent with a PLUS loan, you should qualify. If you’re still in school, but attending less than half time you are eligible for federal consolidation.

Only federally guaranteed student loans can be included in a federal consolidation loan. If you’ve graduated in the past six months and are still in your federal loan grace period, you’re eligible for a lower interest rate on your student loan consolidation.

Borrowers must have at least 1 PHEAA/AES-guaranteed loan to be eligible for federal loan consolidation. Any federal education loans that are in default and held by another lender are not eligible to be included in your federal AES student loan consolidation. If your federal education loans are held by AES, they can be included in your consolidation after they’ve been rehabilitated.

If you obtained a Federal Consolidation Loan in the past, and you have acquired additional federal education loans since then, or you did not include all eligible loans in your previous consolidation, you may be eligible for a new AES student loan consolidation.

Parents who took out loans for their child’s education are also eligible for student loan consolidation. An AES student loan consolidation offers parents the same benefits as those enjoyed by student borrowers.

If parents have PLUS loans for more than one child, they must consolidate them separately. Federal law prohibits the consolidation of multiple accounts together, except for a Federal Spousal Consolidation.

Pros and Cons of A Student Loan Consolidation

As the old saying goes, “There are two sides to every coin”. Here are some factors to consider that may help you make the best decision for your situation.

Pros:

* Reduced monthly payments

* Just one bill to keep track of

* Just one lender to deal with

* Manage your loans online 24/7.

* No prepayment penalties

* Fixed interest rate

* You do not need to be employed.

* Your credit rating does not affect your eligibility.

* Any number of loans may be consolidated

* No minimum balance per federal rules

* Up to 30 years to repay with flexible payment options – level, graduated and income sensitive.

Cons:

* Longer repayment period

* More total interest to pay back

* You may lose some current loan incentives

* Interest rate is calculated as the weighted average of all loans being consolidated, then rounded up to the nearest 1/8 of a percent

* Loss of deferment subsidy for Perkins loans

After you have applied:

The consolidation process can take up to 8 weeks. Until your loan is funded you’ll need to continue paying any student loan bills you receive. Repayment begins within 60 days of the loan funding. The loan funds will be sent directly to the creditors. And, there is no grace period.

While a consolidation loan offers you a longer repayment term and lower monthly payments, keep in mind that the total interest payback over the life of the loan will be much higher.

Having said that, a Federal AES student loan consolidation does allow you to combine one or more existing student loans into a single new loan. If making your monthly student loan payments is putting a strain on your budget, then consolidation might be the smartest option for you.