Can You Consolidate Unsubsidized and Subsidized Loans Together?
Explore federal student loan consolidation. Understand the process, its implications, and key considerations for combining different loan types for repayment.
Federal student loan consolidation offers a pathway for borrowers to streamline their repayment obligations. This process combines multiple eligible federal education loans into a single new loan, known as a Direct Consolidation Loan. Consolidation simplifies monthly payments by replacing several bills with one, potentially reducing the monthly payment amount, and gaining access to a wider range of federal repayment plans or loan forgiveness programs.
Understanding Subsidized and Unsubsidized Loans
Federal student loans are primarily offered as Direct Subsidized Loans and Direct Unsubsidized Loans, both from the U.S. Department of Education. These loan types differ in how interest accrues and who is responsible for it. Understanding these distinctions is important for borrowers.
Direct Subsidized Loans are awarded based on demonstrated financial need. The government pays the interest that accrues on these loans while the student is enrolled in school at least half-time, during the six-month grace period, and during periods of deferment. This means the loan balance does not grow during these times, making subsidized loans generally more favorable for eligible undergraduate students.
Direct Unsubsidized Loans are not based on financial need and are available to both undergraduate and graduate students. The borrower is responsible for all interest that accrues from the moment the loan is disbursed. If this interest is not paid while the borrower is in school or during grace and deferment periods, it will capitalize, meaning it is added to the principal balance. This capitalization increases the total amount owed and future interest accrual.
Consolidating Subsidized and Unsubsidized Loans
Federal student loans, including both subsidized and unsubsidized types, can be consolidated into a single Direct Consolidation Loan. This combines multiple federal education debts into one new loan with a single monthly payment and a fixed interest rate. However, consolidating subsidized loans means they lose their subsidized status for future interest accrual.
Upon consolidation, the entire principal balance of the new Direct Consolidation Loan, including any outstanding interest from the original loans, begins to accrue interest. The portion of the consolidated loan that originated from subsidized loans will no longer have its interest paid by the government during periods like in-school enrollment or deferment. The interest rate for the new consolidated loan is calculated as the weighted average of the interest rates on all loans being consolidated. This weighted average is then rounded up to the nearest one-eighth of one percent (0.125%), and this fixed rate applies for the life of the loan.
Consolidation can also provide access to certain federal repayment plans, such as income-driven repayment (IDR) plans, or forgiveness programs like Public Service Loan Forgiveness (PSLF), for loan types that might not have qualified previously. For example, older Federal Family Education Loan (FFEL) Program loans, Perkins loans, or Parent PLUS loans may gain eligibility for these benefits after being consolidated.
Preparing for Loan Consolidation
Before initiating the federal loan consolidation process, borrowers should assess eligibility and gather documentation. Federal loans must generally be in repayment, grace, or deferment status to be eligible. Loans in default can also be consolidated if the borrower makes satisfactory repayment arrangements or agrees to repay the new consolidated loan under an income-driven repayment plan.
Borrowers will need their Federal Student Aid (FSA) ID, which serves as their login for federal student aid websites. They also need detailed information about all current federal student loans, including loan servicers, account numbers, and current balances. This information can be found on billing statements or by logging into StudentAid.gov.
A crucial step involves understanding the various repayment options available with a Direct Consolidation Loan. Borrowers should research income-driven repayment plans, such as the Saving on a Valuable Education (SAVE) Plan, Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR), in addition to standard, graduated, and extended repayment plans. The Loan Simulator tool on StudentAid.gov can help estimate monthly payments and identify the most suitable option. Aidvantage processes all Direct Consolidation Loan applications, regardless of the servicer chosen for the new loan.
The Consolidation Application Process
The application for a Direct Consolidation Loan is completed through the official StudentAid.gov website. This online portal is the sole avenue for federal loan consolidation, and there is no fee to apply. Having all required information ready, as outlined in the preparation phase, facilitates a smooth application experience.
The online application guides the borrower through selecting which federal loans to include and choosing a repayment plan. The application typically takes about 30 minutes to complete. Borrowers can save their progress and return later.
After submission, the Department of Education reviews the application and communicates with existing loan servicers to pay off original loans. Processing time typically ranges from 30 to 60 days. Borrowers must continue making payments on current loans until notified that consolidation is complete and the new Direct Consolidation Loan has been disbursed. A Loan Summary Statement is provided about two weeks before disbursement, detailing the total amount, new interest rate, and repayment schedule.