In School Loan Consolidation - FAQ

In case you have not heard, interest rates are at an all time low for federal student loans but are scheduled to go up on July 1, 2005. You can consolidate your federal loans and lock in the current low rate for the life of the loan. It’s a bit confusing so here is a FAQ I posted at SDN.
I don’t think I say anything in error here, but in case I did, be sure to check with your financial aid office for the full scoop or call one of your lenders.
Who is eligible to consolidate?
Anyone that has federal loans is eligible to consolidate. This includes Stafford and Perkins Loans.
What are the advantages of consolidating loans
1. You will get a fixed interest rate for the life of the loan. If you consolidate before July 1 that interest rate will be at the lowest rate in the history of student loans. Rates vary a bit depending on the lender and the types of federal loans you are consolidating, but you should be able to guarantee yourself a rate of no more than 3.5%.
2. You can stretch out your payments to 30 years. This will lower the monthly payment. If you want to pay back the loan in only 10 years (or only 1 year for that matter) you can always pay back early without penalty. There are other types of repayment plans but I am not going to discuss those here. It’s sufficient to say that for the vast majority of medical/dental students, picking the 30-year option will be the most beneficial.
3. You’ll only have one payment to make each month when you pay back this loan. This is really a minor benefit.
Will I still be able to defer?
Yes. You will be able to defer while in school at least half-time (undergrad, graduate school, medical school). You can apply for a hardship deferment when you are not in school, for example while in residency. The hardship deferment is a maximum of 3 years and is based on your income (as listed on last year’s taxes). This usually means that for the first two years you’ll automatically be eligible since your income for the first year of residency is based on your income during your last year in medical school (for most people income will be $0). And your second year of deferment during residency will be based on only the first 6 months of residency (July to December) which should make you eligible. Basically what I am saying is that consolidating does not effect your deferment options at all.
What about my subsidized loans? Should I consolidate them?
Yes. During deferment (either in-school or hardship) the funds taken out under the subsidized program will remain subsidized, even after they are consolidated.
What is the story about the grace period?
You are really not losing out on much. You will lose the 6-month grace period if you consolidate. This grace period is meant for people who are graduating from school and looking for a job and who might want a few months before their first loan payment is due. If you are in medical school, you’ll be going into residency shortly after graduation and therefore will be able to enter hardship deferment right away and won’t need 6 months to look for a job. Nothing to worry about here.
What do I do with loans for next year and beyond? I heard I can only consolidate once.
You can consolidate more than once if you have loans to add to your current consolidation. Your consolidation interest rate is based on the weighted average of all your loans. So, if you want, you can consolidate your new loans with your consolidated loan. You’ll have to sit down and figure out which you think will be most beneficial…rolling the new loans into the consolidation or not. You can always consolidate your new loans separately into a separate consolidated loan if you want.
Who can I consolidate with?
Everyone is eligible to consolidate with the federal government ( If you don’t have Direct Loans and only have one lender for all your loans, then you must consolidate with them. If you have more than one lender or if any of your loans is a Direct Loan, you can consolidate with anyone.
Can I consolidate private loans?
No, not under the federal program. Some private lenders might do this under their own program. Each program is different so I won’t talk about them here. This FAQ is about federal loans only (Stafford and Perkins).
How do I go about consolidating my loans?
First, all your loans must be in ‘repayment’ status. This does not mean you need to repay your loans. You just need to change the status. Contact your lenders and let them know you want to put your loans into ‘repayment’ status. If they refuse, tell them to read 34 CFR Section 682.209(a)(5) under the code of federal regulations. Then find a lender (each will have slightly different terms) and ask them to consolidate your loans. Once you are consolidated you will automatically go into in-school repayment.
Is there a deadline?
Yes. You should have your consolidation loan completed and processed before July 1, 2005…at many lenders there is quite a backlog so hurry up and complete the application. Some lenders might automatically lock in your rate as soon as your application is submitted so you don’t have to worry about processing time…get this in writing if this is true.
Is there anything I need to look out for?
Yes. Some unscrupulous lenders might hold onto your application and accidentally not process it until July 2, 2005, at which time you’ll be locked in at the newer higher rate. Other lenders offer awesome bonuses that lower your rate after a certain number of on-time payments…what they don’t tell you is that applying for deferment counts as a late payment and so you never qualify for their bonus rate reduction if you defer (which you will more than likely do when you begin residency).
Hope this answers most of people’s questions.

Just a couple of corrections here:
- if you consolidate with Direct Loans (the only lender with whom you should consolidate if you are going to be in school next year), you do not lose the grace period. You do not have to make payments over the summer.
- if you are consolidating, you should be able to get about 2.77% but DO NOT include the Perkins loans, which have a 5% rate - these will just bring up the rate for everything else.
- even if you only have 1 year’s worth of loans, go ahead and lock in this low rate. It will save you a pile of money.
I have already done my consolidation and it worked out very well.

one thing I didn’t realize going in is that If all your loans are are from a single source, that source has right of first refusal on consolidation. That means you don’t really have a choice about who you consolidate with, so you can toss most of those offers you have been recieving.