Loan Consolidation--Questions and Answers

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Are you pondering the big question, to consolidate or not to consolidate?  The following is information that may help you make your decision and provide guidance.

What is loan consolidation?

A Federal Consolidation loan is combining two or more of your federal loans into one new loan and locking it at a fixed interest rate. In some cases, your repayment period may be extended for a longer period of time and your monthly payment may be reduced.

How is the interest rate on a Federal Consolidation loan set?

The calculation for determining the interest rate is established by the U.S. Department of Education. The interest rate is based on the weighted average of the interest rates on your loans being consolidated, rounded up to the nearest 1/8th percent, or 8.25%, whichever is less. After consolidation, the interest rate is fixed.

Do Federal Consolidation loans offer different types of repayment options?

You have three basic types of repayment options:

Level or Standard repayment:  This option provides equal monthly payments over the maximum repayment period allowed.

Graduated repayment: Your monthly payments start low and gradually increase at specified intervals.

Income-sensitive repayment: Your monthly payments are based on your earnings and

fluctuate with changes in your income.

Loan consolidation companies offer various repayment plans. If you are consolidating with any company, you should inquire about their repayment options. Great Lakes offer Graduated Income Sensitive Repayment Plans based on ‘interest only’ payments.

The most popular plan is the Level Repayment. Many borrowers choose this plan because they like the security and simplicity of a fixed monthly payment. More important, the level repayment plan usually is the least expensive, in terms of total interest charges.

Under the graduated and income-sensitive repayment plans, your initial monthly installments will be significantly lower than the monthly payment required by the level repayment plan. Both plans reduce the payments in the early years of the loan, when the loan balance is highest, your total interest costs will be greater under these plans than under the traditional level repayment plan.

Why should I consider consolidating my loans?

By combining two or more of your federal loans into one will make managing your loans easier especially if you have more than one Servicer. With just one contact, repayment will be less complicated and ensures that all of your loans are receiving the same attention and status updates. You may also reduce your monthly payment by extending the repayment period. If the current student loan interest rate is low, you may be able to lock your variable loans into a low-fixed rate.

Are there any disadvantages to loan consolidation?

Consolidation can significantly increase your total interest costs, because you will be making smaller installments over a longer period of time. Depending on the loan balance and interest rate, consolidation can double or triple your total interest expenses. For example, if you borrow over $60,000 and you consolidate, your new level or standard repayment plan will be spread over 30 years. Please be sure to contact your lender or servicer for an explanation of the terms of your consolidation loan.

Can I switch to another repayment plan at a later date?

Yes. At any time, you can switch repayment plans. There's no extra cost or penalty. Your lender or loan servicer can help you choose a repayment strategy that meets your current financial needs.

Can my spouse and I consolidate our education loans?

No. As of July 1, 2006, spousal consolidation is no longer available.

Can I consolidate defaulted loans?

Yes. If you are in default on your student loan(s), you may request a Federal Consolidation loan after making at least six consecutive, on-time monthly payments. You may discuss an affordable payment option with the lender or servicer of your loan.

The payments cannot be prepaid. Thus, if you have made five consecutive payments, you'll have to wait and make a sixth monthly payment as scheduled before submitting a Federal Consolidation Loan application to a lender that requires six payments.

Loans in judgement or wage garnishment status do not qualify for consolidation. Contact your collection agency for repayment alternatives.

What loans cannot be consolidated?

You may not include private loans you received from banks, credit unions, thrift institutions (savings and loan associations), your parents, or other individuals. Loans issued by colleges also are not eligible. You cannot use Federal Consolidation loans to finance other types of personal debt, including credit card balances and car loans.

How long does consolidation take?

Typically, four to eight weeks. Your consolidation lender must contact the lenders that hold your existing education loans and arrange to pay off each loan. If you have multiple lenders, it may take longer.

You are required to begin repaying your consolidation loan within 60 days of the disbursement date.

Can I arrange a shorter payback period than the maximum allowed?

Yes. Just tell your lender or loan servicer that you would like to pay your loan off faster. For example, you can take up to 30 years to repay a $60,000 loan balance, but you can request a shorter payback period of, say, 15 or 20 years and significantly reduce your long-term interest costs. In addition, at any time

over the course of your payback period, you may make monthly payments that are larger than the required installment amounts or make a lump-sum payoff. There are no prepayment penalties.

If you are interested in consolidating and are not sure what your new interest rate, repayment options, and monthly payment will be, you can contact Great Lakes at 1-800-950-0152 or 1-800-247-0462. You may also go to www.mygreatlakes.com. Another option is to check out the following website with detailed information on borrower benefits and loan consolidation: www.finaid.org. This process will assist you in your decision making on whether you should consolidate or not consolidate.