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Loan Programs
Loan Consolidation
Loan consolidation is designed to
make repaying your loans more convenient and may impact the size of your monthly payments
or interest charges. A lender issues a consolidation loan in the combined amount of the
outstanding principal and accrued interest of all loans which are to be consolidated; it
then pays off the original loans in full. It is important to understand, however, that
consolidating your loans may increase the total cost of borrowing. When considering
consolidation, consult with more than one lender to determine its real cost and advantages
as compared with maintaining separate loans. It may be helpful to ask the following
questions:
How would consolidation affect my grace period and/or deferment options?
How would the interest rate on a consolidation loan compare with the individual interest
rates on my separate loans?
Will I lose or gain interest rate caps?
How does the interest capitalization policy on a consolidation loan compare with that of
my original loans?
Are there repayment options available under consolidation that are valuable to me and that
are not available otherwise?
Will smaller payments and/or the convenience of repaying fewer loans reduce the chances
that I will become delinquent or default on my student loans?
While there are no application or
origination fees to consolidate, there is a possible hidden fee. Upon consolidation,
accrued and unpaid interest is capitalized (added to the principal balance). Thus, future
interest charges are based on a higher principal balance; in essence, interest is charged
on your interest. This always happens just before entering repayment if you have postponed
paying interest during your training; however, consolidating early would cause an
additional capitalization, the cost of which could outweigh the savings from a reduced
interest rate. Generally, it is advisable to wait to consolidate until a few months before
repayment will begin, unless:
You want to lock in a very low
interest rate that may not be available in the future (since the rates on your variable
loans will change);
You need the convenience of having fewer lenders to correspond with during your training;
You don’t want to take the risk that the terms of federal consolidation could change
for the worse between now and when you are finally ready to consolidate
and/or
You wish to consolidate at a specific time to maximize your deferment eligibility (see
below).
A federal loan on which a borrower has defaulted is eligible to be consolidated only if
the borrower has, prior to the time of application, made satisfactory repayment
arrangements with the holder of the loan and provides evidence of those arrangements to
the consolidating lender. The borrower must have made at least three and up to six
consecutive ‘reasonable and affordable’ monthly payments on the defaulted loan.
Married couples are now able to consolidate their federal loans together. Each individual
must agree to be held jointly and severally liable for repayment without regard for the
amount of his/her individual indebtedness or any future change in marital status.
Furthermore, life and permanent/total disability insurance coverage would not go into
effect unless both individuals meet these conditions. ORP/PM recommends that couples
not consolidate their loans together.
There are two federal consolidation programs: Federal Loan Consolidation (for all federal
loans) and HEAL Refinancing (for Health Education Assistance Loans only).
Federal Loan Consolidation
Federal loans may be consolidated through either the Federal Direct Loan Program (whereby
funds are borrowed directly through the federal government without a private bank as
intermediary) or through a private
participating lender. In either case, the consolidation is considered a federal loan.
Interest Rates
The terms of federal consolidation differ in some respects depending upon whether you
apply through the Direct Loan Program or a private bank, although the basic method for
calculating your interest rate is the same. Consolidation loans issued on/after February
1, 1999, receive a weighted average of the rates on the loans being consolidated at the
time of consolidation, rounded to the next higher 1/8 of 1%. This fixed rate cannot
exceed 8.25%. (Loans issued prior to that date received a variable rate capped at 8.25%.)
Some private lenders offer interest rate discounts to borrowers who make a certain number
of consecutive, on-time monthly payments, or who arrange to have payments electronically
debited from their checking account.
You may apply for consolidation to determine what rate the lender would charge; if the
rate is higher than you would like to pay, you may decline the consolidation by not
signing the promissory note. The interest rates of many of your current student loans are
variable. Therefore, the timing of your application for consolidation could impact the
fixed rate you are offered. Since future variable interest rates are unknown, it is often
impossible to predict with certainty whether consolidation will save you money. However,
sound judgments based on probability and your tolerance for risk are still possible.
Impact on Grace Period and Deferment Eligibility
Federal consolidation refreshes your remaining deferment eligibility to their original
levels, even if you had used some or all of these deferments before consolidating. The
timing of consolidation therefore has an impact on your overall deferment eligibility. For
example, those who borrowed their first Stafford Loan prior to July of 1993 are eligible
for a 2-year residency deferment. If a resident anticipating four years of training waits
until the end of PGY-2 to consolidate, he or she could qualify for deferment though the
entire residency program. If this same group of borrowers were to consolidate through the
Federal Direct Loan Program, they would also become eligible for new deferment categories
currently only accessible to newer
borrowers. Deferment on Stafford or Direct Loans is valuable, since interest does not
accrue on subsidized loans during these periods. Based on a subsidized Stafford/Direct
Loan balance of $34,000, each year of deferment provides up to $2,800 in interest savings.
In considering the timing of consolidation, also take into account that there is no grace
period on a consolidation loan. Consolidating too soon could cause you to lose your
post-graduation grace periods.
Special Treatment of HEAL
Health Education Assistance Loans may be included in a Federal Direct Consolidation. While
HEAL rates are relatively low now, they have no cap and present some long-term risk.
Private lenders may refuse to accept HEALs; even if they do accept them, they would charge
a rate that is not competitive on that portion of the consolidated debt; therefore, it
would be beneficial to apply for consolidation through the Direct Lending Program if you
wish to include HEALs. If your HEAL rates are low, they could help to lower the fixed rate
that would be charged on
a Direct Consolidation. Conversely, if HEAL rates are high, they could raise your
consolidation rate.
Treatment of Other Federal Loans
Aside from Stafford/Direct and HEAL loans, you may also include Perkins, Health
Professions Student Loans (HPSL) and Loans for Disadvantaged Students (LDS). These loans
charge only a 5% interest rate, and are subsidized during deferment periods. Including
them in a consolidation would increase their rate, but could also decrease the overall
consolidation rate if you have a substantial balance. You could ask the consolidating
lender to run two scenarios for you—one with these loans, and one without. CAUTION:
HPSL and LDS loans lose their interest subsidy when they are consolidated!
Choosing Loans to
Consolidate
At the time of consolidation, you may be selective in choosing only certain federal loans
to include, as long as there is at least one Stafford/Direct loan. If you choose to add
other eligible loans later, your consolidation interest rate will be recalculated. To add
loans 180+ days after the original consolidation, it is necessary to apply for a new
Federal Consolidation Loan at whatever terms are being offered at that time. In other
words, adding loans could impact the terms of the rest of your consolidated debt.
The Value of Convenience
You may be able to decrease the number of lenders to whom you are required to make
payments by consolidating. However, it is not always necessary to consolidate to gain
convenience. As an alternative, you may request that your preferred lender buy Stafford
loans from your other lenders, and combine them. The loans would still remain separate
entities, and their terms would not change. However, they could all be included on a
single monthly billing statement. Combination is a way to gain convenience without
changing the terms of your loans. Combination is not possible between Direct Stafford
loans and Stafford loans borrowed through a private lender, or between Stafford/Direct and
HEAL loans.
Heal Refinancing
An alternative option for consolidating HEAL is HEAL Refinancing. This type of
consolidation is for HEAL loans only. It offers a variable rate with no cap, much like
your current HEAL loans. However, the variable rate calculation could be more attractive,
and your deferment eligibility would be refreshed at the time of consolidation. Borrowers
who anticipate lengthy residency training sometimes prefer to consolidate HEALs this way,
since the HEAL program offers up to four years of residency deferment.
(Consolidating HEAL with Stafford loans would cause
HEAL to take on Stafford characteristics, including deferment eligibility.) For current
lenders and interest rates, you may consult the Department of Health and Human Services
web site.
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