Consolidating student loans with the government

The key terms for federal consolidation loans do not vary by lender: no application or origination fees are allowed and there are no prepayment penalties.

Federal law sets the period of time for paying back the loans and sets a ceiling on the interest rate.

You can get a consolidation loan from any private lending institution with government approval, or from the Department of Education itself. Some offer favorable terms like interest-rate reduction for making on-time payments or choosing automatic withdrawal; others may offer repayment plans that better suit your financial situation.

Current law dictates that you can only consolidate once, so if you consolidate at a 6 percent interest rate and rates later drop to 3 percent, you’re out of luck.

There are two exceptions: if you’ve since gone back to school and acquired new student loans, or if an outstanding loan was excluded from your original consolidation.

When you opt for student loan consolidation, you’re working with a lender who will pay off your existing balances.

They will, then, replace those loans with a new, consolidated loan and a new monthly payment.

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