Private versus Federal Consolidation Loans – What’s the Difference?

A consolidation loan lets you combine your federal student loans into a single loan with one monthly payment. There are two programs available for consolidating student loans:

-The Federal Family Education Loan (FFEL) Program, through which banks, secondary markets, credit unions, and other lenders provide the consolidation loan

-The William D. Ford Federal Direct Loan (Direct Loan) Program, through which the federal government provides the consolidation loan

There are several differences between these programs, as outlined in the table below:

FFEL Program

Lenders - Banks, secondary markets, and credit unions

Loans accepted - Can accept all eligible loans from eligible borrowers, but are not required.

Repayment Plans- Offers four repayment plans

- Standard Repayment Plan

- Graduated Repayment Plan

- Extended Repayment Plan

- Income - Sensitive

Repayment Plan (in which the monthly payment amount is set according to the borrower's income and loan debt)

Timing of consolidation

Borrowers can consolidate after they have left school and all of their loans are in grace or repayment.

Direct Loan Program

Lenders - Federal government

Loans accepted - Must accept all eligible loans from eligible borrowers

Repayment Plans - Offers four repayment plans

-Standard Repayment Plan

-Graduated Repayment Plan

-Extended Repayment Plan

-Income - COntingent Repayment Plan (in which the monthly payment amount is set according to the borrower's income, family size, and loan debt)

Timing of consolidation

Borrowers can consolidate while they are still in school.

In other ways, the two loan programs are similar:

-They both have options to allow borrowers who have defaulted on their loans to consolidate those loans.

-In general, neither of them charges prepayment penalties or origination fees, nor are credit checks or co-signers required. However, some private lenders may charge processing fees.

-The base interest rate on your consolidation loan is the same regardless of the lender. However, private lenders may offer additional incentives such as a reduced rate if you make your payment on time and if you have your payment automatically debited from your bank account.

Keep in mind that if all of your loans are through one lender, that lender has the first option to consolidate the loans. Only if that lender declines can you go elsewhere.