Can You Consolidate Subsidized and Unsubsidized Student Loans?
Consolidate your federal subsidized and unsubsidized student loans. Gain clarity on the process, eligibility, and financial specifics.
Federal student loan consolidation offers a pathway to simplify the management of existing federal education debts. It involves combining one or more federal student loans into a new, single loan known as a Direct Consolidation Loan. This process creates a single monthly payment, replacing multiple payments that might be due to various loan servicers. Beyond simplifying payment logistics, consolidation can also provide access to a wider range of repayment plans, including income-driven options, and potentially open doors to certain loan forgiveness programs.
Understanding Federal Student Loan Consolidation
A Direct Consolidation Loan effectively pays off your existing federal student loans and replaces them with a new loan from the U.S. Department of Education. The interest rate for this new consolidated loan is a fixed rate, determined by taking the weighted average of the interest rates on the loans being consolidated. This weighted average is then rounded up to the nearest one-eighth of one percent.
A notable feature of Direct Consolidation Loans is how they treat the interest subsidy of original subsidized loans. While the consolidated loan has a single interest rate, the portion of the new loan that originated from subsidized loans retains its subsidized status. This means that during periods of approved deferment, the federal government will continue to pay the interest on that specific portion, preventing interest from accruing. In contrast, interest on the unsubsidized portion of the consolidated loan will accrue at all times, regardless of deferment status.
Qualifying for Consolidation
Eligibility for a Direct Consolidation Loan is generally straightforward, focusing on the type and status of your existing federal student loans. Most federal education loans are eligible for consolidation, including Direct Subsidized and Unsubsidized Loans, Federal Family Education Loan (FFEL) Program loans, and Federal Perkins Loans. Additionally, certain health professions loans can also be included.
A primary requirement for consolidation is that the borrower must not be in default on their federal student loans. If a loan is in default, a borrower typically must either make satisfactory repayment arrangements, often involving a few consecutive payments, or agree to repay the new Direct Consolidation Loan under an income-driven repayment plan. Importantly, private student loans are not eligible for federal consolidation and cannot be combined with federal loans through this process.
Preparing for Your Consolidation Application
Before initiating the consolidation application, gathering necessary information and making key decisions can streamline the process. You should identify all your federal student loans, noting their types, current servicers, outstanding balances, and existing interest rates. This information can be accessed through your Federal Student Aid (FSA) account on StudentAid.gov or by contacting your current loan servicers.
Another crucial step involves understanding and selecting a repayment plan for your new consolidated loan. Consolidation can provide access to various repayment options, including Standard, Graduated, Extended, and several Income-Driven Repayment (IDR) plans. Choosing an IDR plan, for example, can adjust your monthly payments based on your income and family size.
You also need to decide whether to include all eligible federal loans in the consolidation or only a subset. If any of your loans are currently in a grace period, consolidating them will typically cause you to lose the remainder of that grace period, and repayment will begin within 60 days after the consolidated loan is disbursed. However, the application allows you to request that the servicer delay consolidation until closer to the grace period’s end date.
Submitting Your Consolidation Application
Once you have prepared all necessary information and made your decisions, the application for a Direct Consolidation Loan is typically completed online. The official application is available on the StudentAid.gov website. The online application guides you through selecting the specific federal loans you wish to consolidate, choosing a federal loan servicer for your new loan, and selecting your preferred repayment plan.
During the online submission process, you will be prompted to review all the entered information for accuracy. You will then electronically sign the Direct Consolidation Loan Application and Promissory Note, which serves as your agreement to the terms and conditions of the new loan. After submission, you should receive a confirmation.
The processing of a consolidation application generally takes several weeks, with repayment typically beginning within 60 days of the consolidated loan’s disbursement. It is important to continue making payments on your original loans until you receive official notification that they have been paid off by the new Direct Consolidation Loan.