Only loans that are in repayment or in the grace period are eligible for consolidation, and a Direct Consolidation Loan must include at least one Direct or FFEL Program Loan.
Loans that have been in default can be consolidated after three consecutive monthly payments have been made or if the borrower agrees to repay the consolidation loans under an income-driven repayment plan (where the payments are based on the income of the borrower).
In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan.
While refinancing is often used in other realms of finance (like mortgages) to describe repaying a single older loan with a new loan, consolidating with a private loan technically includes refinancing as well since the term and interest rate of the new loan are different from the old loans.
Federal consolidation loans can only be used for federal student loans, but private consolidation loans can be used for both federal private student loans.
Consolidation loans repay old loans with a brand new loan that has its own unique terms and conditions.
It takes borrowers an average of 21 years to repay their student loans, while 28% of students are in default (or miss payments for 270 days or more) within five years of entering repayment.
The picture painted by these statistics is clear: many borrowers are in over their heads with student loan debt and are looking for relief.
The following table illustrates how a weighted average works.
In this example, there are three students that each have three loans.
Some lenders require that the borrower’s debt-to-income ratio be below a certain threshold.
Many lenders also factor in a borrower’s employment stability and prospects – they may even have minimum annual income requirements.
The new Direct Consolidation Loan provides a single fixed interest rate that is equal to the weighted average of all the loans being consolidated, and the interest rate is rounded up to the nearest eighth of a percent (0.123%).