2/16/2005 - The Administration is proposing to significantly restructure the current loan consolidation program to better address the needs of both current and former students.

The current interest rate formula for Consolidation Loans, in which borrowers lock in a fixed interest rate, deprives some borrowers of the benefit of falling interest rates while increasing Federal interest subsidies to lenders on other loans where borrower rates are fixed at a low level.

The 2006 budget request would replace the current fixed-rate interest formula for Consolidation Loans with the variable rate formula used for student loans, placing current and former students on equal terms.

Note: If you're thinking about consolidating your student loans, you are strongly encouraged to do it now, before you miss out on locking in today's historically low fixed rates for the life of the loan. A variable rate means your interest rate may fluctuate year-to-year, thereby increasing your interest fees you'd have to pay. Please apply today.]

Currently, borrowers wishing to consolidate may face complicated procedures and limited choices. The Administration proposes to eliminate all barriers to consolidation or reconsolidation, including the statutory provision limiting a borrower's ability to choose their consolidation lender.

For borrowers reconsolidating previous consolidations, the budget also would create a 1 percent origination fee in recognition of the financial advantage of reconsolidation. Similarly, the current one-time lender fee on all new Consolidation Loans would be increased from 0.5 percent to 1 percent.