Federal Student
Loan Consolidation

Federal Student Loan Consolidation is made available by The Higher Education Act (HEA) which provides for federal student loan consolidation under both the Federal Family Education Loan (FFEL) Programs and the Direct Loan Program. Under these programs, a borrower’s loans are paid off and a new consolidation loan is created.

Federal student loans are guaranteed by the U.S. government. In a federal student consolidation loan, existing loans are purchased and closed by a loan consolidation company or by the Department of Education (depending on what type of federal student loan the borrower holds). Interest rates for the consolidation are based on that year's student loan rate, which is in turn based on the 91-day Treasury bill rate at the last auction in May of each calendar year.

Student loan rates can fluctuate from the current low of 4.70% to a maximum of 8.25% for federal Stafford loans, 9% for PLUS loans. The current consolidation program allows students to consolidate once with a private lender, and reconsolidate again only with the Department of Education. Once the student has consolidated their loans, the loans are set to a fixed rate based on the year they consolidated; reconsolidating does not change that rate.

Federal student consolidation loans are often referred to as "refinanced", which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.

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