Understand consolidation repayment terms
Interest rate
- The interest rate on your Federal Consolidation Loan will be a fixed rate for the life of the loan. Your rate will be the weighted average of the loans you are consolidating, rounded up to the nearest 1/8th of one whole percent, not to exceed 8.25 percent.
- The consolidation rate may result in a slightly higher rate, since it's rounded up to the nearest 1/8th of one percent. On the other hand, if the loans you consolidate have a variable rate that is set to increase, you can lock in a lower, fixed rate.
- Your consolidating lender may offer a reduction in the interest rate if you make on-time, electronic payments (direct debit). It's always a good idea to ask your lender about these and any other discounts.
- No interest will accrue on loans made on or after October 1, 2008 (or on the portion of a Direct Consolidation Loan used to repay such a loan) for military borrowers serving in an area of hostilities.
Note: Even though the consolidation will be one loan, if you have subsidized and unsubsidized loans that you are consolidating together, they will be tracked separately. If you decide to return to school or enter into another deferment period, the subsidized portion of your loans will retain the benefit of having the interest paid for you during that time. The only exceptions to this rule are Perkins Loans. If you consolidate Perkins Loans, they are included in the unsubsidized portion of the Consolidation Loan and do not retain their interest benefits.
Repayment period
- You can use loan consolidation as a way to manage your debts. In some cases, you can reduce your monthly payments, helping you meet other financial obligations.
- Consolidation extends your repayment period from the standard 10-year repayment up to 30 years, depending on the total amount of your educational loan debt (federal and private).
| Amount Consolidated | Maximum Repayment Period |
|---|---|
| $7,500 - 9,999 | 12 years |
| $10,000 - 19,999 | 15 years |
| $20,000 - 39,999 | 20 years |
| $40,000 - 59,999 | 25 years |
| $60,000 and higher | 30 years |
While increasing the repayment term reduces monthly payments, it increases the amount of interest you will pay. You will pay more interest over the life of the loan, unless you increase your payments or prepay the loan (without penalty) once your financial situation improves.
Use the consolidation worksheet to estimate your monthly payments, principal, and interest, and compare this to your existing loan payments.
Payment Plans
When you begin repayment, your loan holder offers several flexible payment options:
- Standard (equal) repayment is the traditional approach. You will pay less interest under the equal payment plan than under your other options.
- Graduated repayment begins with lower payment amounts that increase over time. This allows payments to be smaller in the beginning of repayment with increases in stages during the repayment period.
- Income-sensitive repayment adjusts your payment annually based on your gross income.
- Extended repayment offers a lower payment by stretching out the life of the loan. If you received your first loan on or after October 7, 1998 and have a total FFELP loan balance of more than $30,000, your repayment term may be extended up to 25 years. Note: If you meet the above qualifications, you can have your repayment period extended for up to 25 years without consolidating your loans. Check with your lender about the pros and cons of this option.
- Income-based repayment limits your loan payments to 15 percent of the your (and your spouse's, if applicable) income that exceeds 150 percent of the poverty line for your family size.
Repayment example
You have the following loans you're considering consolidating:
Loan A: $2,625 balance, 4.13 percent interest
Loan B: $3,500 balance, 5.2 percent interest
Loan C: $5,500 balance, 6.1 percent interest
Loan D: $5,500 balance, 6.8 percent interest
If you consolidate these loans (a total of $17,125), you'll have 15 years (180 months) to repay your Consolidation Loan. The weighted average interest rate of the loans is 5.839 percent. This is rounded up to the nearest 1/8th of one whole percent, resulting in your fixed interest rate of 5.875 percent.
If you repay your Consolidation Loan under an equal payment plan, your monthly payment will be $143.36. In the end, you will have paid $25,804.18, which includes $8,679.18 in interest.
Repayment tips
- Check to see if your loan holder offers automatic payment withdrawal. This is an easy way to make sure your payments are made on time. Some loan holders even lower your interest rate if you sign up for this option.
- You may prepay all or part of your loan at any time without penalty. Prepayment can substantially reduce your interest costs.