Consolidation and refinancing can be a beneficial way to reduce the overall and monthly costs of your educational borrowing. For this reason, so long as the consolidation/refinance is specific to your education loans and maintains the basic characteristics of an education loan it will not affect your eligibility for LIPP assistance. In general, the proceeds of the consolidation/refinance should be applied directly, and exclusively, to the payment of the prior educational loans.
Special care should be taken with consolidation/refinancing through a commercial bank loan, since some programs may not be designed to qualify as a tax benefit-eligible education loan. Please be advised that if you lose qualified education loan status as a result of this type of refinancing, future LIPP assistance may need to be disbursed as taxable income which the LIPP office will not gross up to offset the added tax liability for in this scenario, which may result in a higher out-of-pocket expense for the participant.
To ensure your new loan will remain eligible for LIPP you should contact the LIPP office prior to initiating the consolidation/refinance. In order to remain LIPP eligible, your new consolidated/refinanced loan must meet the following conditions:
- It must have a repayment term of no less than 10 years, including payments already completed
- It must have a fixed interest rate (some consolidation loans offer variable rates which carry substantial risk of significant interest rate increases in the future)
For your own protection, the benefits that you should be most concerned about maintaining are the 10 year repayment term, grace period post-graduation, the ability to pre-pay on your loans, and your forbearance and deferment options. If you lose your grace period as a result of consolidation you will be responsible for any payments within the first 6 months from graduation. You should be aware that a consolidation will make you ineligible for the Federal Public Interest Loan Forgiveness Program, since only Federal student loans are covered by that program. Additionally, many consolidation or refinance loans do not offer forbearance or deferment options. There is a substantial risk to giving up these options, because you will not be eligible for a temporary suspension of payment should you need one for financial reasons such as unemployment or returning to school. Should you choose to return for a PhD you will not be eligible for LIPP coverage during the first 2 years of your PhD program on any consolidated/refinanced loan which does not have an in-school deferment option; you would need to make arrangements to cover those payments without LIPP assistance.