The Center For Debt Management
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Student Loans:
Avoiding Deceptive Offers

... Continued From Previous Page

Special Considerations for
Consolidation of Federal Loans

Student loan consolidation is combining several loans into one with a new repayment term and interest rate. This is generally offered in connection with federal loans. Here's how to help identify potential problems related to loan consolidation:

  • Avoid lenders and marketers who use high-pressure sales tactics. Some marketers pitch that your interest rates may go up if you do not consolidate immediately!  Whether and when interest rates for consolidating your loans will change depends on what type of loans you have. Look at your loan documents to determine whether the interest rates are fixed or variable:

    • If all of your education loans have fixed interest rates, there may be no deadline to consolidate.

    • If some or all of your loans have variable interest rates, when you consolidate into a fixed loan it may affect the interest rate of your loan. ED publishes new variable rates for some federal loans each July 1st. The annual rate changes can raise or lower the interest rate offered on a consolidated loan because the consolidation interest rate will be the weighted average of all loans consolidated.

Whether or not you have a targeted timeframe, take your time to determine whether consolidating is right for you.

  • Some lenders impose restrictions on promised discounts. Some may disclose these limits only in the fine print. Read the fine print in your loan documents to find these types of conditions:

    • Some lenders lower the interest rate on your consolidated loan, but only if you opt for automated payments from your checking account.

    • Other lenders discount the interest rate on your consolidated loan, but only if your loan has at least a specified minimum loan balance.

    • Still others agree to lower the interest rate on your consolidated loan, but only if you remain current on your payments for the life of the loan. You may want to consider loans with more immediate discounts, a shorter on-time payment period for interest rate discounts, or an additional discount for signing up for automatic payments.

    • Some lenders sell consolidated loans to other companies. Because benefits of consolidated loans — like promised discounts — may not transfer, you may lose benefits if the lender sells your loan. Ask the lender whether the terms of your loan will change if it is sold.

    • Be cautious about consolidating federal loans and private loans into one private loan. The result of consolidating all loans into one non-federal private loan means that you lose all the benefits and protections provided in the federal loan programs.

    • Consolidating a Perkins loan may not be in your best interest. You may lose unique deferment and cancellation rights available to Perkins loan borrowers.

    • Frequent consolidation after borrowing may impact timelines you need to meet to qualify for these benefits.


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