In the United States both the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDLP) include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.
Interest rates and payments
Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.
History
The Federal Loan Consolidation Program was created in 1986. In 1998, the United States Congress changed the interest rate to the aforementioned fixed rate weighted mean, effective February 1, 1999. Consolidation loans taken out before that date had a variable interest rate, determined by the individual FDLP loan origination center (e.g., in the case of a university, that university) or FFELP lender (e.g., a third party bank).[3][4]
In 2005, the Government Accountability Office considered consolidating consolidation loans so that they were exclusively managed through the FDLP. Based on several assumptions about future variations in interest rates, the loan volume, the percentage of defaulters, cost estimates from the United States Department of Education, it concluded that while doing so would incur an additional cost of $46 million, caused by the higher administrative costs of the FDLP compared to the FFELP, this would be offset by a $3,100 million saving comprised in part of avoiding $2,500 million in subsidy costs.
Consolidation loan lenders
Top consolidation lenders ranked by total FY 2006 consolidation loan originations
| Lender name | # of loans | Amt of loans ($) |
|---|---|---|
| Federal Direct Student Loan Program | 1,169,110 | $19,197,268,873 |
| Sallie Mae | 866,295 | $19,841,423,841 |
| Citibank | 232,126 | $4,843,119,089 |
| Nelnet | 198,624 | $4,796,065,812 |
| NextStudent | 89,284 | $3,320,024,025 |
| JP Morgan Chase | 115,777 | $2,668,451,098 |
| Goal Financial, LLC | 111,426 | $2,494,856,673 |
| College Loan Corporation | 75,360 | $2,245,128,826 |
| AES/PHEAA | 166,730 | $2,037,618,548 |
| Student Loan Xpress | 114,790 | $1,880,997,383 |
| Wachovia Education Finance | 80,174 | $1,674,979,763 |
SOURCE: Stafford (FFEL & Direct) and PLUS (FFEL & Direct) Loans, from the National Student Loan Data System (NSLDS), US Department of Education, Fiscal Year 2006.
