Prepayment Penalty On Consolidation Loans

Q: I have recently graduated from grad school, and have about nine separate federal student loans. Some of these student loans are Federal Grad PLUS loans and some of them are Direct Stafford loans (subsidized and unsubsidized). I would like to consolidate all of these loans, so that I only have one monthly payment, however I would like to know if there are any prepayment penalties on a consolidation loan, and if the Grad PLUS loans are eligible for consolidation?

A: Student loan consolidation can be a useful tool for borrowers who are in need of reducing their current monthly payment amount, or for borrowers in need of reducing multiple monthly loan payments into a single monthly payment. However, before applying for a consolidation loan, individuals should understand both the pros and cons of student loan consolidation. Read our 10 Best Student Loan Consolidation Tips to learn more.

A Grad PLUS loan is eligible for consolidation under the Direct Consolidation Loan Program, as are most other types of federal student loans. As for prepayment penalties, there are no prepayment penalties on a direct consolidation loan, giving borrowers the opportunity to pay a portion or all of the unpaid balance without any early payment penalty or fee. A borrower who plans to make a prepayment towards their loan should understand that the prepayment amount may not automatically be applied to the principal balance of the loan. Any prepayment amount received will first be applied towards any outstanding charges or interest before it is applied to the principal balance of the loan. In addition, if the amount the borrower will be prepaying is double the amount of their standard monthly loan payment, it will be treated as an advanced payment for the following month, therefore borrowers must always specify that it be to be applied towards reducing the principal balance of the loan.

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