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June 21, 2010
The Fine Print: Exceptions and Caveats
The interest rate on a consolidation loan is the weighted average of the interest rate on the loans being consolidated, rounded up to the nearest 1/8th of a point and capped at 8.25%. The interest rates listed in this article are the new rates on the variable rate loans rounded up to the nearest 1/8th of a point.
Borrowers who have already consolidated their loans cannot take advantage of the drop in interest rate.
Borrowers with loans originated after July 1, 2006 are not eligible for the new lower rate.
Private student loans cannot be included in a federal consolidation loan.
Borrowers who are still in school cannot consolidate their loans until they graduate, as Congress repealed the early repayment status loophole in 2006.
Borrowers who received prompt payment discounts from their lender will lose those discounts if they consolidate.
Borrowers who received up-front discounts on their loans, such as fee waivers, may lose those discounts if they consolidate, depending on the terms of the discounts. However, generally the savings associated with locking in the loans at historically low interest rates will outweigh the value of the lost discounts.
It is not advisable to include Perkins loans in a consolidation loan, as one loses the subsidized interest and favorable forgiveness benefits associated with a Perkins loan if the loan is consolidated. Also, since the interest rate on the Perkins loan is already fixed, there is no financial benefit to consolidating them.
Likewise, there is no financial benefit to including fixed-rate federal education loans in with variable rate loans in a consolidation loan. However, to the extent that the weighted average preserves the underlying cost of the loans, there is also little harm in including fixed rate Stafford and PLUS loans in with variable rate loans in a consolidation loan. Borrowers may wish to consolidate the loans together to simplify the repayment process.
There is no requirement that a borrower who consolidates his or her loans switch from standard ten-year repayment to a longer repayment plan, such as extended repayment or the new income-based repayment plan. Some borrowers may choose to use extended repayment to maximize the term of the historically low interest rate. However, if they do so, they should use the reduction in the monthly payment to pay down more expensive debt. Otherwise they are merely increasing the amount of interest they will pay over the life of the loan.